E is for Ethics

As if it is an oddity, I'm going to step out on a limb, and make a couple of strong statements... then we'll see if I can back then up. The first statement is:

At the core, ethics are a fixed behavior.

I do believe that ethics are learned, but I think that they are learned young. We could have a whole Nature vs. Nurture argument here, but the main point isn't much different. By the time someone is old enough to get their real estate license, their ethics are fairly fixed. Of course, I do think that people can change, but... they aren't going to go to a 4 hours NAR ethics class and "see the light" and leave as an ethical REALTOR(R), unless they were an ethical person when they walked in the door. If they were likely to lie or cheat before the class, they are likely to lie or cheat after the class. If they were a Boy Scout or Girl Scout and adhered to their Oath before the class, they will still do that after the class.

Stupidity, Laziness and Ethics aren't mutually exclusive.

A very ethical REALTOR(R) can be a terrible agent to hire. Not because of the NAR Code of Ethics, but just because they aren't very bright. They might also be lazy. Personally, when I am looking for a person to represent me, I want someone that is honest, smart, and hard working. And, I mean all three. Think about it for a moment... ok, do you want someone that is unethical, but smart and hardworking? They will find creative ways to take your money. Do you want someone that is ethical, stupid, and hardworking? All burnout, and no launch (drag racing metaphor, they can spin the tires, but never get anywhere). What about someone that is honest, smart and lazy? This one might be able to do the trick, but only if they have a great system, and people in place to fix their weaknesses... but probably not. Intelligence, ethics and ability to get the work done are the three legs of the stool.

Ethics, Honesty and Political Correctness sometimes clash.

OK, here is where I will try not to get myself in trouble. Raise your hand if you know what steering is. The problem is that it is unethical, according to the NAR as well as the state real estate commission to steer, but one can be guilty of steering if one shows properties to a client that they ask for. Let's say you are working with a client that has a couple of small children. This client asks to see properties that are in neighborhoods where the majority of residents are also families with children. As a REALTOR(R), you know of a couple of subdivisions that are just loaded with kids... and there are four homes for sale that fit their needs. You take your buyers there, and they buy a house. By a strict interpretation of ethics guidelines, you have committed the sin of steering. The properties you were showing were picked based on familial status. In order to avoid steering, you'd have to show homes ONLY based on features of the home, so you'd have to offer a selection of properties that might fall outside of the "family friendly" guideline set about by your client. The reason I picked the familial status is that it is the one we don't ever think about. We have race and nationality and religion at the forefront of our minds, but that familial status can creep in and catch us unaware. Especially when we are looking at it from the family friendly side of the equation. Whats worse is that we really aren't supposed to answer any questions about those subjects unless we are referencing statistical data... and even then we are on shaky ground. That means that if I answer a direct question from my buyer, I might be considered unethical... not to mention politically incorrect (and I don't mean in the Bill Mahr, totally PC politically incorrect way).

So, you might find that your ethical, honest and hardworking real estate agent is dodging questions...

D is for Due Diligence

Welcome to part four of my A-Z journey through real estate. Of course, this isn't a definitive glossary of real estate terminology, techniques, strategies or idea, but rather just a few answers to questions. Of course, for every question that gets answered, at least one new question is raised. I guess that makes it like most everything else.

Which brings me right back to Due Diligence. Simply put, Due Diligence is the process of gathering needed information about a property. Some of the information is volunteered, for instance the Seller's Disclosure. Here in GA, the sellers are required to disclose any defects of which they are aware, as well as past defects which may have been corrected. The beginning of the Due Diligence process would include reading the Seller's Disclosure to see if there is anything striking and/or disturbing. Keep in mind that if the seller properly discloses a property defect, the buyer is buying the property with knowledge that defect exists. If the seller were to not include a defect that is known to them to have existed on the property, they could still be liable to correct that defect, even after the sale of the property is executed.

The usual next step in the process of performing Due Diligence would be to have the property inspected by a certified. professional, competent home inspector. There may be issues which the sellers are not aware, or there may be issue which the sellers are knowingly hiding. The inspector's job is to locate these, and inform the buyer of their existence. In some cases, further inspection by a specialist might also be called for. A HVAC technician, electrician, or engineer might need to look at situations beyond the scope of a standard inspection. These specialists might employ techniques and technology not available to a regualr home inspector. Also, the vast majority of the time, an additional inspection needs to be performed to search out wood destroying organisms. These "termite inspections" (which look for a lot more than just termites) are usually required by banks if there is financing, and always a good idea.

Depending on the expected future use of the property, proper Due Diligence might also include checking county records to determine if a proposed use will be allowable. If one wants to convert the property to another type of zoning, or wishes to expand the living space, or add an addition, there might be restrictions from the city, county or subdivision. It is the responsibility of the buyer to determine this during their Due Diligence Period in the contract, if not before entering the contract. If there is a HOA (Home Owner's Association) or other governing board for the community, it is also the buyer's responsibility to get a copy of their Covenants, Conditions and Restrictions (CC&Rs) to review during this same period.

There may be many other questions which would need to be answered during the Due Diligence Period of the contract. Generally, finding these answers are the responsibility of the buyer and/or their agent.

There is one item which ISN'T done by the buyer or their agent, but is done on their behalf. That is the title search. It is performed by (or for) the closing attorney, on behalf of the seller and their mortgage company. The buyer generally pays for the mortgage company's premium for the resulting title insurance. I would add, that the buyer should almost always also pay for additional title insurance to cover themselves if a title problem arises. Problems are rare, but could be devastating.

Stay tuned for E...

C is for Contingency

A contingency is simply a condition that must be satisfied in order for the contract to execute.

In real estate, there are several common contingencies, as well as a gazillion uncommon ones. In this post, we are only going to go over a few common contingencies. As I said previously, a contingency is a condition that must be satisfied for the contract to execute. In math, it would be an "If/Then." If the contingency is satisfied, then the contract moves forward.

The most common contingency we see is an inspection contingency, or a variation. Here in Georgia, there are three different options that fall under the umbrella term of inspection contingency. The first option would be an As-is sale. In an as-is sale, the property is purchased as-is, effectively without an inspection contingency. The next level would be the traditional sold with right to request repairs. In this case, there is an inspection period, at the end of which, a list of requested repairs are submitted to the seller by the buyer, and the negotiations start anew. The most far reaching version is sold with right to terminate. With a right to terminate, the buyer can terminate the sale during the predetermined period, for any reason, or no reason. The buyer may also submit an Amendment to Address Concerns. This would function largely the same as the Amendment to Remove Inspection Contingency does for the sold with right to request repairs contingency. It allows the buyer to negotiate for issues that are found during the inspection or during due diligence.

The next most common contingency that we deal with is the financing contingency. The buyer is required to state what type of financing they are seeking, or if they are seeking a cash sale. In a cash sale, there is no contingency for financing. More common, the buyer needs to get some sort of financing in order for them to purchase the home. In this case, the buyer will include the percentage of financing (Loan to Value, or LTV), the maximum interest rate, and the term, as well as whether it is fixed are adjustable. Other details may also be required. Finally, there will be limits placed on the timeframe for application for loan, pre-approval letter, and underwriting approval. These can be negotiated in the contract.

A less common contingency, but one that is very important in this market is a Sale or Lease of Buyer's Property. With a sale contingency, the buyer only is required to complete the sale if their current home sells within the period set about by the contract. In some cases, this may also include a Kick-out Provision. The kick-out provision allows the seller to continue to market the property, and if they receive another acceptable contract, the first buyer has a specified period of time to drop their sale contingency, or the seller can terminate the contract.

Finally, there is the Back-up Agreement. If the property is already under contract, this allows a buyer to be next in line shouls the current contract fail. In a hot market, this is a great tool to use.

This is by no means an in-depth discussion of the various contingencies, but rather an overview with a quick description of each. This will allow a new buyer or seller to know what types of contingencies they might face in buying or selling real estate.

B is for Buyer's Agent

Simply put, a buyer's agent is the agent that works for the buyer in a real estate transaction.

More importantly (for now anyway) let's talk about what a buyer's agent is not:

• The nice agent a buyer works with from the new home community.
• The helpful agent that has listed the property (unless there is a dual agency agreement).

In both of the above instances, the agent may be a great person, but they are working specifically for the seller. Their job is to protect the best interests of the seller. They are required to be deal honestly with the customer (that would be the buyer), but they aren't looking out for the buyer's best interests.

In order for an agent to be "The Buyer's Agent," they need to be working under a Buyer's Agency Agreement. The BAA outlines the specifics of the relationship between the buyer and the agent. It will include a few different things.

• Scope of the agreement. Locales. I have one investor client in particular that uses different agents for different areas and specialties. The agreement can include to where it shall be limited.
  
• Payment. Most agreement state how much the agent will be compensated. Mine say that I will receive 3%. I have yet to have a problem, since almost every listing pays 3% or more in this area. I have had one buyer interested in a property that paid less. We talked about it, and we figured out an arrangement, but the sellers couldn't come to an agreement with the buyer on price.
  
• Time frame. I generally work with buyers on a six month contract, but there is always...
• A way out of the contract. I usually include one for both the buyer and for me. Either of us can fire the other with some sort of cause. I might fire the buyer because they aren't pursuing financing pre-qualification, or actively trying to buy the properties they are seeing. They can fire me if I am not able to find them... or pretty much anything else. They just need some sort of reason that doesn't start with "I found this great house for sale by owner..."
• An explanation of duties. What should the agent do, and what should the client do?

I always give folks a "free look" period where we will go out and see some properties. They can get to know me, and I can get to know them. We can each see if there is a fit. When working with buyers, the fit is very important. I might spend a lot of time with them looking for properties, as well as negotiating the property, and other tasks required to get from looking to contract to closing... and sometimes after closing.

The bottom line is that in order to make sure that you are protected as a buyer, you need to have someone working specifically for you. The listing agent or the community agent isn't that person. And, since there is seldom a cost to the buyer to have representation, there is no reason to not retain a buyer's agent.

A is for Appraisal

An appraisal is simply an estimate of value made by a certified appraiser. That is all...

However, there are a few other terms that are often used (wrongly) as interchangeable with appraisal. Other value estimates, such as a BPO or CMA are often confused with appraisals. While all three aim to accomplish the same thing, there are a few key differences.

The most common real estate valuation tool is a CMA. They may also be referred to as CMSs, but are essentially the same thing. While we generally agree on the initials, what they stand for varies from region to region, and even agent to agent. Almost everyone seems to agree on Market Analysis for the MA part, but the C might be either a Competitive or Comparative Market Analysis. So, we can say that a CMA is a Competitive Market Analysis or Comparative Market Analysis. Please note that the A should never stand for appraisal unless the agent is also a licensed appraiser. Regardless of the initials, a CMA is performed by a licensed real estate agent. The value is arrived by looking at comparative properties (comps). Features and amenities are taken into account to adjust for square footage, style of property, lot size and description, as well as general property condition. As with all comp based measures, the similarity and proximity of the comps, as well as the accuracy of any adjustments may have a huge impact on the quality of the result.

Another tool, although less common, is the BPO. BPO stands for Broker Price Opinion, and despite the name, can be performed by agents as well as brokers. The primary market for BPOs are banks or other corporate entities that are trying to get prices in order to dispose of property. A BPO is a bit more in-depth than most CMAs. It will include comps, as well as repair estimates. It allows the reviewer to determine if they are financially better off selling the property as-is, or if they should improve the property prior to sale. Again, the similarity and proximity of the comps will have a major impact on the quality of the results.

Appraisals come in several types, depending on the property being appraised, as well as the purpose of the appraisal. In some cases, especially true when replacement value is being calculated, or if the property is very unique, cost of current reconstruction is used for the basis. This may then be adjusted, again, depending on the usage of the appraisal. For a market value, there may be a mark-down from cost, but for an insurance value, there may not be. Market appraisals are another type of appraisal. These are quite similar to CMAs and BPOs, but may be more in-depth. Usually more emphasis gets placed on square footage and lot size, and less on buyer preferences. When a buyer is getting a loan, this is the type of appraisal the bank will order prior to approving the loan. Also note, that in most instances, the bank will only be concerned that the appraisal comes in higher than the loan amount. The main thing to remember about market appraisals is that they are also comp based, like CMAs and BPOs. The final appraisal type we'll cover is a tax appraisal. The way this is done will vary from market to market, but these are generally the least accurate valuation for a property. Here in GA, the last sale price is the value of the property and is adjusted by a blanket percentage whenever the county commission deems it appropriate. While it is quite accurate right at closing, within a few years, it might be very high or very low, depending on how your specific location has changed in value compared to the more general location you are in. I've seen just as many properties sell for half of the tax appraisal as I have that sold for twice the tax appraisal. For determining the value of a property that hasn't been sold for a few years, it is severely lacking in accuracy.

Are you a first time home buyer willing to be on TV?

Every once in a while, we fall into an opportunity. Here is one if you qualify, and are selected.

There is a new program that is looking to film first time home-buyers as they visit homes, make a selection, and then offer for a house. Everyone gets a shot at their fifteen minutes of fame. Filming will be in Atlanta beginning next month and continuing in October.

Obviously, I can't guarantee that any particular person will be selected. But, if you are interested, and not currently working with a real estate agent, email me for details. The production company won't pay for your house, but they say that they will provide a "nice closing gift" for those selected.

I think it would be a lot of fun.

A little more Moab, with a few friends...

Meet Pat Johnson of the blue CJ. This poor guy is often my road trip companion. This particular picture was on one of our Moab trips. If you look at the Moab, My Happy Place post, you'll see the tow rig dragging our toys out there. Here is Pat playing in the "Wedgie" on the Poison Spider Mesa trail. It started as a great day, and ended as a great story.

Poison Spider Mesa leads to a trail called the Golden Spike. That connects to a trail called Gold Bar Rim. That combo is generally an all day affair. It took us a little longer.

As I mentioned, everything started out great, but then we started having a few problems. We had five Jeeps in the morning. The first Jeep exploded a lock-out. He had a spare and was soon on his way again. The second Jeep had a serious case of angle issues with the carb. It kept getting worse, and he decided to turn back. The driver of the Jeep with the previously blown hub agreed to accompany him out. I wish I had a transcript of the CB conversation between those two on the way out. We could hear them all of the way into town.

Next up is Patrick Bennett of the olive CJ. He has built a VERY cool Jeep, but this day was not to be great for the Jeep. A short while after this picture, the power steering pump gave up its long fight. And then, an over-extended driveshaft caused further delay. In both cases, we were able to get everything back together and moving along.

Because of the delays, we hit on if the more famous obstacles on the Golden Spike at the most beautiful time of day, that golden light just before sunset. The problem is that it takes about five hours to drive back out to paved roads. That means that four hours is done after dark... and it was REALLY dark. Even with extra lighting, finding the trail markers became a challenge on the slickrock. In fact, it was enough of a challenge that our only passenger, Pat Johnson's wife Helen, had to walk in front of out little three Jeep caravan with a flashlight, searching for the trail markers. These faded markers were painted every few hundred feet, but were difficult to see with headlights. A wrong turn could lead to a disaster. At one point, we were on the end of a point. One way lead down a series of steps along the trail. The other lead over a 300 foot cliff. They looked the same from the driver's seat by headlight. Add an extra hour to only drive at walking speed.

We seriously considered camping for the night. Despite the daytime temperatures in the 90s and higher, nighttime temperatures were in the 50s. We took an inventory of our stores... several bottles of water, tarps, and a single "Lunchable" left over from lunch. We also had a few small bags of chips, and a couple of granola bars.

We decided to keep going.

After a little hiking at an intersection, we were soon on our way down the Gold Bar Rim trail. We were almost home free. The one problem we still faced was that Gold Bar Rim empties out into a valley that is criss-crossed with sand wash roads. It is also still 15 miles or so from pavement. It was dark. there were no signs, and none of us had run this particular trail before.

Referencing a map and a GPS, we determined the general direction to the exit of the canyon. I had run another trail in the area three years before on a previous trip.

We managed to find our way back to the pavement, and eventually to the condo. We had started on the trail around 10am, and finished the day at 2am. It was rough. But, all in all, it has been a great story to re-live every so often around a campfire. I've been back since then, and plan on going again before too long.

Real Estate Investing 203 - Shifting Classes and Uses

Back in Real Estate Investing 101, Part II, I briefly mentioned "Shifting Classes" after the Buy & Hold strategy. There are a few different ways to shift classes and uses that can build value for investors.

Residential to Commercial

One of the most common ways to increase value while shifting classes or use is to have a property re-zoned from residential to commercial usage. A property that is located on a busy street would be a prime example. The busy street lowers the value for a residential property because of the noise and associated traffic. It is even more true of a corner lot. So, this busy location is a detriment.

However, for a commercial property, the traffic is an asset. If it is a corner lot with heavy traffic on multiple sides, that is even more of a bonus. A savvy investor might see the commercial potential of a property, possibly even years before having it re-zoned. In fact, it is preferable to buy the property well before it can be converted to commercial zoning and rent it out for residential purposes. The reason that one may choose to do it this way is that the property can be purchased for the best price, and then carried with the costs offset by a renter while the investor seeks to have the property re-zoned. Depending on local rules and nearby zoning, as well as future plans the city may have, it might take a year or more to get the property properly re-zoned. Meanwhile, because the property is located on a busy thoroughfare, advertising for renters is as easy as putting a sign on the property.

Keep in mind that frontage may be just as important for commercial property as acreage. That is another reason that corner lots are such a premium. They have as much as twice the frontage/acre as a lot on just one street. Obviously, lot dimensions will play into this, but in almost all cases the corner lot is the premium.

Low Density to High Density Residential

Another popular way to increase land value is to change it from a lower density residential to a higher density residential usage. Finding a single property or an assemblage of properties to re-zone to higher density can increase the attractiveness of the property to a developer.

Of course, as with most real estate, location is everything. A townhouse or condo development might not be in demand in a less densely populated area, but might support very high valuations in a sought after area. It might also be a great way to capitalize on a smaller parcel adjacent to a popular subdivision. For those familiar with the St. Marlo subdivision at the extreme southern end of Forsyth County out side of Atlanta, The Weston, which is next door is a great example.

Apartment to Condo Conversions

This is an often overlooked strategy that is similar to flipping, but on a huge scale. It is out of the realm of most investors, but purchasing an apartment complex and converting them to condo can be extremely profitable. This is especially true of a slightly older community. As the community ages, the demand for it may decrease. As demand drops, the rent may not keep up with fresher complexes. At the same time, the mechanical systems will be getting ready for an overhaul. If one can purchase the entire operation at a reasonable price, one might be able to flip it to individual ownership.

There are a few different strategies that can be employed depending on the needs of the investor as well as the needs of the community and subject property.

Starting at the lowest end of the economic scale, if the property is converted to condo, there might be reluctance from current residents. One way to overcome this is to build a pricing model that allows the majority to remain in place, increase the value of the community and more quickly sell the remaining units. Finding a financing solution that allows the tenant to be converted to a buyer means that one doesn’t need to market as many units. Offer to pay closing costs, finding sources of down payment assistance or 100% loans would also help to ease the transition. If there is a way to allow the current residents to buy in below the prices that the property will be marketed at, this is even better. This gives the current residents instant equity, and they will be more likely to be better neighbors since they now have a stake in the community. Occasionally, converting to low income housing may also carry tax benefits for the investors. Having single unit or multi-unit investors in line should there be residents that don’t wish to purchase is also an option, but not as attractive since there will be a lot of residents without a financial stake in the community.

The same strategies can be used with higher priced properties as well. But, financing is often easier to set up. Many of the residents may already to considering purchasing their next residence, and allowing them to buy in below market will be very attractive. Set up several programs that allow different pricing based on renovations to existing units. Offer a low price for un-renovated units (only to residents in those units), a mechanical only upgrade, and a full upgrade including fixtures, etc. For a full upgrade, one might offer a nearby similar unit to allow a faster transition.

This can also be done with vacated apartment complexes, but there will generally be much higher renovation costs. However, the profit margin may be significantly higher. While driving through New Orleans earlier this year, I couldn’t help but think that there were huge opportunities in renovating apartments.

Commercial to Condo

Loft conversions are hugely popular. Most of the conversions that are currently being done are very high end. However, this can be done at various price points. The primary difference will be in the level and quantity of finish for the units. Finding a building worth saving, that is convertible to residential space is the first challenge. It needs to be unique and have plenty of character.

If one is shooting for the lower end of the market, all that needs to be done is to provide the stubs for plumbing, and require the buyer build out kitchens and baths on their own. Set some sort of minimum standards, and be sure all work is permitted and done to local code.

Moving up, one may choose to put in baths and a kitchen, either fully finished or in some other state agreed by the buyer. One could also go as far as to have several private rooms, and fully outfit the space with high end finishes and fixtures. Additional amenities could be included ranging from pool and parking to high-speed, wireless internet access.

In all of the condo conversions, whether from apartments or commercial space, it is very important to set up some sort of Owner’s Association. This will help keep cohesion in the community as it is populated. This also provides a mechanism to care for common property and maintain amenities. Another issue that the OA will need to deal with is the level of renters for the community. The lower the percentage of renters v. owner-occupants, the lower the maintenance needs generally are. However, if there are no renters allowed, it might adversely affect resale values. There are a lot of different strategies for dealing with that particular situation.

Want to sell your home to an investor?

I get the occasional call from people that have a house they wish to sell quickly. Often, the home is in less than optimal condition (sometimes heinous is a word that creeps into my mind). They range from estate sales to pre-foreclosures to rentals that the owner doesn't wish to handle any more. Usually, these people are wanting to market to my investor database. Sometimes, I don't think people understand what this entails.

Investors are looking for houses that they can use to make money. In order to make money the house needs to offer one or more possibilities.

• It needs to be flippable in its current condition. If you just need out of a house immediately, an investor might be willing to buy at a discount and sit on the house while a proper marketing plan is implemented.
  
• It needs to be priced so that it can be improved and re-sold. Perhaps you know that the kitchen looked dated when the Brady Bunch was still on prime time. Maybe there are deeper problems. An investor might be willing to put the money and time into the property to increase its value.
• It is in an optimum area to rent, or already has solid renters and can offer positive cash flow.
• The property might be reclassified to a higher use (residential to commercial for example).
• The property is in an area that shows huge potential for appreciation.

The last two are actually more inline with speculation than investment, but I included them anyway since investors and speculators sometimes overlap.

The thing that potential sellers need to keep in mind is that investors are looking for a profit. They are taking on risk, and want to be rewarded. Be prepared to NOT get an offer to buy your house at or above market price. Whether you are calling me, or HomeVestors, or Ug Buys Ugly Houses, or another agent, don't expect to see an offer much over 70% of the FMV (Fair Market Value). If the home needs work, look for an offer that is around 70% FMV minus the costs of any improvements. And, that isn't the cost of buying the stuff at Home Depot and doing it themselves... it would be the cost of having a reputable contractor perform the work properly.

I am not trying to knock anyone down. On the contrary, I have found that a lot of sellers are glad to sell the property under these conditions. Executors of Estate often have heirs SCREAMING to get money from property the decedent left to them, and other times there are bills that need to be paid and the sellers are glad to find a buyer that will close in a week or two. In these cases, the sellers understand that they are giving away money in order to close quickly.

In other cases it is a poor fit for the seller. They would be better off listing the property and selling it through traditional methods. If they can bring the property up to selling condition (fixer uppers seldom sell for even market minus repairs needed, and in this market can be a VERY tough sell), and carry the property until it sells then selling to an investor is not going to be the first option to consider.

If you are looking to invest, or have property to sell (to investors or not) I can help you.

If you are interested in real estate investing, I have a great series for you:

Real Estate Investing 101, Part I

Real Estate Investing 101, Part II

Real Estate Investing 201, More about Flipping

Real Estate Investing 202, Buy and Hold

Real Estate Investing 301, Advanced Strategies

I would also recommend:

One Improvement too many

What Buyers are Looking for

Repairs, Improvements, Upgrades and Resale

Do you have a Unique Selling Proposition?

I could probably find a few more... and then if I started adding other people's posts... well, you wouldn't have time to actually do anything, just read about it.

Atlanta Area Motosports Calendar

We have recently set up a Motorsports Calendar for Atlanta area events. Not only do we have big events like the NASCAR race at Atlanta Motor speedway and the NHRA Nationals at Commerce, but we also have local SCCA events, as well as Legends races and other amateur events at various venues around town.

Here is a direct link to the calendar.

If you or your club host an event that you would like included, such as a competition event, show and shine or even a club meeting, please feel free to let us know. We'll happily post your event on our Atlanta area Motorsports Calendar.

Mud Bogs, Drags, Solos, etc. are all welcome to be posted.

We do ask that you send a short blurb about the event, which we will post, along with any relevant contact info, in a link from the calendar entry.

How many blog posts do I need for a book?

I was just noticing that several of the people that have commented on my blog have written, or are writing books.

I have 56 posts here, and a few that didn't make it here that I have on other venues. I also have a few published articles on Ezine... and I have a few more in the pipe. As you can tell from looking at my previous posts (OK, not the one about the kid and the dog) I can be pretty verbose.

So, should I write a book? In my previous life I was a published photographer, and published magazine author... but that was all travel and 4wd related stuff.

It would be fun to be able to have my books listed on Amazon, and available for sale through my website.

;^ )

Wouldn't you love to own this wonderful "INVENTORY"?

I'm about to post up another rant...

I have long had an issue with business school terminology sneaking into general usage. It all goes back to about 1987 when I worked at the Heartthrob Cafe & Philadelphia Bandstand in downtown St. Paul, MN. I was a Soda Jerk. It was a great job, and there was a pretty good staff.

One of the managers that came in when the restaurant opened was a business school graduate from Chicago. She found out a couple of things during her first winter in Minnesota. The first thing that she found out was that Chicago wasn't really that cold. The other thing she found out was that people don't want a big plate full of grilled product. There was a corporate head chef that went around to all of the locations and made sure that every single dish was up to snuff. He met with the staffs to make sure that the delivery experience was exactly how it should be, and he wanted everyone in the place to remember that people were choosing to give us money in order to eat great food. Notice that it wasn't product, but food.

I don't remember the manager's name that said the offending phrase, but I remember the exchange well.

Manager: "Remember, when you deliver product to the table,.."

Corp Guy: "Excuse me, what did you say?"

Manager: "When you deliver product..."

Corp Guy: "Stop. (looks at assembled staff) You don't deliver PRODUCT. You deliver FOOD. People eat FOOD. People don't eat product. I NEVER want to hear our food referred to as product."

Manager: "I think you are just being picky. Everyone knows that the product is food, but it is just easier to call it product. That was how we did it in business school."

Corp Guy: "So, your telling me that in business school you learned that people would prefer to eat a plate of product rather than a seared, hand rubbed steak that is cooked to perfection? I bet they would also prefer to listen to product rather than dance to a great song. How about commuting to work in a product rather than enjoying the drive in their convertible Mustang? It isn't easier to say product instead of food, car or music. I think you are smart enough that your vocabulary can include all of those words."

Manager: "That's unfair..."

Corp Guy: "Really? Do you think that all of the wait staff should go up to the tables and ask them how their product tastes? Or if everything is fine with the product? Does anyone need more product?"

Manager: "Of course not."

Corp Guy: "Why?"

Manager: "It doesn't sound special or appealing."

Corp Guy: "Really? But we shouldn't think of it as food? We should think of it as just a random product? No, I think what needs to change is that you need to remember what we do here. We serve food."

Manager: "Yes Sir."

She never called it product again.

So, was there a point? Yes. Many of us do the same thing with homes. We refer to them privately, and sometimes even publicly as inventory. These are the places that our clients raise their children. They find out the best and worst news of their lives. They retreat to these places to relax, enjoy family time, and rejuvenate themselves each day. They spend their time, money and energy to show the world that they love this place.

It isn't inventory. It is someone's home. People don't do all of that for their inventory. Inventory isn't where the heart is.

Home is!

Are we our own worst enemy?

I think in many cases the answer is yes... we are.

I recently signed up with a site called Hungry Agents. It was recommended to me by another agent. But, as I looked over the way they do business, something occurred to me. Their business model commoditizes real estate agents. They also don't seem to be aware of the difference between real estate agents and REALTORS (R), but that is another post (one day).

For those that aren't familiar, the basic premise of the business is that sellers sign up for the service. They put out the selling of their home to bid by real estate agents. There is a form online that real estate agents fill out stating what percentage we are willing to take the listing for, as well as the percentage that we suggest be passed along to buyer's agents. There is a minimum level of service required for the percentage we quote.

All of that is fine and good. The problem is this...

All that the seller sees is the percentages that the agent quotes. They don't see the agent, their prior performance, what else they might do (the minimum standards are pretty slim by my standards) or anything else. The listing is reduced to only being about the percentage.

My firm offers an "unbundled" service option for $3100 plus buyer's agent commission (we always recommend 3%, but the sellers have the option of making it higher or lower). With the exception of a CMA, the unbundled program offers the minimum basic services required by Hungry Agents. But, for a traditional listing, we offer a lot more services. I would bet that just about ANY full service agent offers way more service than is required by Hungry Agents. But, the problem is that sellers using a service like this see EVERY AGENT as offering the same level and type of service, and EVERY AGENT as being an interchangeable cog that functions the same. We are a commodity. Our service is nothing more than the service of our least capable competitor. Like gasoline.

As I said in Do you have a Unique Selling Proposition, if we don't differentiate, we are a commodity no different than gasoline or concrete. And, for commodities, the only way to set one provider apart from another is price. That is it. The worst thing we can do is turn our service into a commodity.

Final note... I don't really mean to pick on Hungry Agents. I am sure that they are not alone. In fact, there are a lot of companies that are also commoditizing our service. They don't separate themselves from the crowd, and so all they do is cut price. The only reason I highlights HA is that they were the unfortunate souls that sparked the thought.

Real Estate Investing 301 - Advanced Strategies

Real Estate Investing 301

Advanced strategies

In Real Estate Investing 101, Part I we covered buying a house to resell for a short term profit, while minimizing risk and making it happen fast. We delved further into flipping in Real Estate Investing 201. In Real Estate Investing 101, Part II we covered buying and holding property for long term appreciation and wealth building. We also touched on class shifting to increase value. Real Estate Investing 202 continued on the Buy and Hold theme and offered deeper insight into making it profitable. In Real Estate Investing 203, we looked at shifting property classes for “highest and best use,” while increasing property value and return.

This time, we are going to look at investing from a different perspective. The previous articles have been about buying property “wholesale” and selling it “retail”. But, there is another way to buy property that may be more efficient as well as more profitable.

Want to make $50,000,000?

Invest in REO Bulk Portfolios. The problem is that this is out of reach for the VAST majority of real estate investors. It requires a huge commitment of time, energy, and (most importantly) cash. For a $50M profit, one should expect to spend a little more than $100M. But, the result can be a fairly passive profit in the 40%-50% range within 6 months to a year.

Decoding the alphabet soup

REO is industry jargon for Real Estate Owned. This is property that has be foreclosed and repossessed by mortgage lenders. Some lenders retail the property through traditional channels. They hire real estate agents to market the properties along side any other area property. The lenders usually have a few more hoops for buyers to jump through, and often aren’t in the best of condition. These are the foreclosed properties mentioned in the earlier articles.

Bulk REO portfolios are simply large groups of properties that the mortgage lender doesn’t want to take the time to market. By gathering these properties together, they are able to dispose of them more efficiently. Since they often need to sell them quickly because of banking regulations, they price them to move. They can be priced any where from 40% to 70% of BPO or LTV. Of these, pricing relative to BPO is much preferred.

BPO is Broker Price Opinion. It is similar to an appraisal, but much simpler and less expensive. It is also like a CMA or Comparative Market Analysis that your local real estate agent might provide when you are looking at buying or selling a home. Contrary to the name, a BPO may be issued by a real estate agent that isn’t licensed as a broker. When dealing with REO bulk portfolios, some sellers might not actually hire a broker or agent to do the opinion. In cases where the properties are new (builder loan defaults and other similar situations), they may rely on online valuations. This is rare, though. The bottom line is that is the property carries a BPO of $200,000, and is being sold at 50% in the package, it is costing the buyer $100,000. The BPO also takes into account the current condition of the property, including repairs it may have needed at the time the BPO was issued.

LTV stands for Loan To Value. In this case, if the property originally sold for $100,000, and the buyer put $5,000 down, the LTV would be 95%. So, in theory, if the property is being sold at 50% LTV, and the buyer is paying $100,000 for it, the bank loan was about $200,000. The problem is that we don’t actually know what the property might be worth. On one extreme, the defaulting owner may have put 20% down. Sticking with our $200,000 house, this means that they put up $40,000, and the bank was on the hook for $160,000. At 50% LTV, the bulk buyer would be paying $80,000 for the property. At the other end of the scale, the buyer might have put nothing down, and they might have overpaid for the property. With the current real estate climate, there is a possibility that the property devalued. Further, when people aren’t able to make their house payment, maintenance and repairs are often deferred. So, we might be talking about a property that was purchased at $200,000 with a 100% loan, but now is only worth $150,000. Buying it at $100,000 (50% off of LTV) still would yield a profit, but not as much as buying at 50% BPO, which would be $75,000. The biggest problem with buying based on LTV is predictability. We don’t have as much of an idea about the retail value of the property in its current condition.

Now for more of the basics

As previously mentioned, these are portfolios, and are purchased in bulk. Calling up the local bank will not get you a 50% deal on property. Bulk REO portfolios are usually offered in packages starting around $50,000,000. Most are sold in packages priced at $100M to $500M per transaction. Some packages are $1B or more. There are a few consolidators that will sell smaller packages, but they are generally marked up as they are broken up. And, because these are broken up from bigger packages, it is more difficult to specify property types. Even the smaller packages generally start around $10M.

With the more traditional packages, priced at or above $100M, the buyer is able to custom order the properties. The buyer can request only properties within a certain geographic area, price range, and type (single family, attached, commercial, etc.). Keep in mind that we are talking about a LOT of property. Even with a valuation of $300,000 each, at 50% ($150,000), there would be over 650 properties in a $100M bulk portfolio. Finding all of the properties to fit the order would normally take a few counties, at least.

When the order is placed, the compiler puts a package together. The package may be from a single institution, or from multiple institutions. In order to place an order, the buyer fills out an order form, provides a Letter of Intent (LoI), and completes a Non-Circumvent, Non-Disclosure Agreement (NCND). They also must get the information ready for their Proof of Funds (PoF) letter that will be required by the selling financial institution.

A Letter of Intent may also include the order information. However, primarily the LoI is just a document that states that the buyer wishes to purchase a bulk REO package. It may also outline what types of properties the buyers wish to buy; otherwise that info will need to be provided on the order form.

In order to maintain the security of the involved brokers and principals, a Non-Circumvent, Non-Disclosure Agreement is entered into by all of the parties. The NCND keeps the buyer’s broker, the seller’s broker and the principals from disclosing sensitive information to outside parties, as well as keeping them from going around anyone involved in the agreement to complete future sales.

A PoF letter is exactly that proof of funds. These transactions are seldom done with mortgages in any recognizable format. We will go into why this is the case in just a moment, but for now we will just say that the sales are done through a wire transfer. In effect, the sale is a cash sale. The property is sold without encumbrances, and with a clear title.

After the compiler gets the order together, there is a short period, generally about 48 hours, during which the buyer can reject specific properties from the package. At the beginning of the period, the buyer puts up a deposit (like earnest money) that is generally 10% - 15% of the package purchase price. With the completed list of properties in hand, the 48 hour countdown to reject properties begins. They have seven days to complete ALL due diligence. After seven days from the delivery of the order, the deposit goes hard. In other words, it is no longer refundable. The transaction is generally closed about 15 days from the delivery of the order to the buyer.

Since these deals go from beginning to end in 15 days or so, there is simply not enough time for a bank to go through the steps they would need to finance the property purchase based on using the property as security. However, after closing the transaction, it may be possible to get a package loan on 60% - 80% of the cost of the properties. However, this will complicate the disposal transactions and decrease profits. So, at closing the buyers need to have their funding in place, and it needs to not be dependant on the property.

Strategies for selling hundreds of properties

For most buyers, holding the properties isn’t the option that they are looking for. Turning the properties is the goal. Generally, there are a few different strategies that sellers use to dispose of the properties. These depend on both the properties and the type of buyers.

Wholesale sellers sell to other investors at a discount from BPO. This allows them to minimize further expenditure, while maximizing return for less than optimal properties. The properties can often be moved fairly quickly. One drawback is that more expensive properties are more difficult to sell. Most retail investors are competing for the lower end of the market.

Retail sellers spread their properties around to real estate agents to list. These are often asset management companies and other similar business entities. These may be the properties that one sees listed as “corporate owned” in the MLS. In many markets, this can bring the maximum return, but is really only viable for the best of the properties. And, it may take a long time.

Properties that don’t move through the other methods generally end up in auction. The biggest problem is that by the time get to auction; they have been left sitting for many months or even more than a year. Most properties will have degraded further from sitting disused. Even if they haven’t grown mold or been trashed by squatters, they have cost money to carry. That may be directly if a loan was obtained to pull cash back out of the property, or indirectly through lost opportunity costs.

So, how should we get rid of the properties?

I would recommend a combination of the accepted methods, but with a twist. A good real estate agent will know which properties are likely to sell without much hassle. This agent should also be able to give pricing scenarios that minimize market time, while preserving at much margin as possible. So, feed this agent the cream of the properties, and price them aggressively to sell quickly.

For the properties that aren’t going to sell at retail, mix them between wholesale and auction strategies. Surprisingly, auctions often deliver better prices for the seller, but if there are too many properties sold at once, the market is diluted. The same holds true for the properties that are to be sold wholesale to investors.

Finally, properties that aren’t likely to sell well through the traditional channels might be best disposed of through selling at very deep discounts to contractors or other vendors. These super deals can really help to curry favor and move your other projects to the top of the scheduling heap, as well as provide leverage for pricing discounts.

Innovative strategies for smaller investors

Because of the financial resources required to complete one of these deals, they are generally restricted to only the highest level of individual investors, as well as institutional investors. Actually completing the transaction, from start to finish would normally take a bare minimum of $12M - $13M. In addition to the $10M for the property, there would need to be a reserve for improvements, taxes, commissions and other transaction expenses. Almost all of this needed to be effectively in cash (ok, not in cash, but in available capital. For a $100M bulk REO purchase, one might expect to spend an additional $10M.

By turning around the property disposal and beginning by auctioning off some of the properties that aren’t cherry picked off of the top, additional cash is generated. This should reduce the additional capital requirement. Basically, it would fund the later stages of the transaction, as well as spin off cash to begin to pay back the investor, or investors.

A great strategy for smaller investors would be to form a group (I’m not a lawyer or accountant, so I can’t go into structure such as LLC, Corp, or partnership, etc.). Instead of focusing on ownership of individual properties, the investment could be treated as more of a passive investment. Hire a good real estate professional, or have a major partner responsible to run the day-to-day operations of the properties. Aside from the marketing for the properties to be sold retail or wholesale, and any renovations that are needed for any of the properties, there isn’t much management that needs to be done. There will need to be marketing for the auctioned properties as well, but if those are disposed of early in the transaction, that need will be minimized.

While there may be increased expenses from purchasing in smaller quantities, part of that may be offset by being able to sell at higher prices. When selling 50 – 100 properties, there are many more options than there are when selling 500 – 1000 properties. When looking to dispose of 750 (nominal number) properties, more will have to be auctioned and wholesaled simply to make the remainder logistically possible. Aside from renovation resources (time, money and contractors), marketing and selling properties can be expensive for a real estate agent. Hitting one with 300 properties might be counter productive. However, having too many agents can make logistics more difficult, as well as increase overall marketing costs because of duplicate efforts.

Building a relationship with the Bulk REO Portfolio sellers, by doing regular transactions (perhaps quarterly, or even monthly if properties can be sold quickly enough) will often allow for leverage on brokerage fees. Another advantage of working regularly with the same REO sellers is that they may be able to bundle small orders with larger orders to lower the price in relation to REO. For $10M packages, many compilers are looking to sell at 60% or even a little more. As the order size grows, the price may come down to 50% for $100M deals, and even as low as 45% for $1B packages. If a $10M order gets bundled to a $100M order, the smaller order might get filled at 55%. That extra 5% discount can translate to $500,000.

Research. Plan. Prepare. Remember the old adage that it takes money to make money. This holds true in buying Bulk REO Portfolios as well. This time it means it takes a LOT of money… to make a LOT of money. Also, understand your own market and your own limitations.

Real Estate Investing 202 - Buy and hold Strategies

Real Estate Investing 202

Digging a little deeper in Buy and Hold strategies

In Real Estate Investing 101, Part II, we covered buying and holding property for long term appreciation and wealth building. This is by no means a get rich quick scheme, but is one of the most proven ways to build wealth over time.

Finding an appropriate property

Just like with flipping, property is a required ingredient. In fact, the same sources will work for buy and hold strategies as for flipping. The primary difference is that buy and hold strategies are generally a little less stringent on cost control, as well as condition. One can be in the property for a little more money because there isn’t a short term margin to mind. REOs (bank owned property), pre-foreclosure, short sales, older homes needing updating and strong but ugly properties are still the best options.

Rental homes are more price sensitive for marketing. While a flip may be done at any price level, rentals are a bit more picky. While it certainly requires knowing the market, generally in the Atlanta area, the best options are in the $125k to $250k area. There are opportunities below that, as well as above, but the meat of the Single Family Residential (SFR) market will be around this range.

Under $125k- Pro- Just as with a flip, these properties are easier to carry when they aren’t producing. Con- Even with a generous appreciation, the actual cash value will not go up as much as with more expensive properties.

$125k to $250k- Pro- This is the most active area of the market. There are more renters available, so it may be easier to keep the property occupied. Con- This is the most active area of the market. There are more properties to compete against for the renters.

$350k to $500k- Pro- These are executive rentals, and usually the renters will be more mindful of the property. There are property owners that concentrate on this market because it is quite profitable and low hassle. Con- There are higher costs to carry the property when it isn’t rented, and it may require more expenditure between renters to update the property. The renters will be pickier about amenities, fixtures and finishes.

Over $1m- Pro- The rental rate to cost is usually higher because of the rarity for SFRs. Most of these properties will be commercial, which usually have longer leases and often don’t require the landlord to make the improvements of maintain the property. Con- For the SFR market, this is a rare rental. There certainly are some out there doing well, but they will be shorter term (usually) and require more and more expensive marketing to fill. For commercial properties here in Atlanta, one needs to be very careful because there is a LOT of available commercial space.

Putting together the numbers

As with the flipping article, I have an Excel spreadsheet to examine the deal more closely. It isn’t fancy, but it does help keep all of the important points front and center so that the details don’t get in the way of the big picture.

When filling out the spreadsheet, the light gray areas are for users to input information. The light green areas have calculated values. Remember, the more accurate the input information, the more accurate your profit analysis will be.

As with flipping, it is very important to know what the upfront costs will be, both for acquisition, but also for any required renovation. However, unlike flipping, if the investor wants to reduce costs, and has the needed skills, doing more work themselves, instead of hiring contractors can be more manageable. Most investors aren’t going to have a bunch of projects running at once. If one DOES plan to have a lot of project going at one time, or if one is not appropriately skilled, hiring contractors is a better plan.

On the linked worksheet, we can see that the fictional investor purchased a property for $200k. It needed a further $25k in renovations. After renovation, the unit has an expected rental of $2250/mo. and requires about $1800/mo. to carry. I factored vacant periods in, as well as needed maintenance through the use of set-asides and reserve funds. These are included in the monthly carrying costs. I specifically expect a 90% occupancy rate. That may be a bit high, but I also tried to balance that by under shooting the expected annual increase in value.

As we delve into the numbers, what we find is that the cash flow accounts for a total of over $550k over the thirty year period. Further, the property increases in value by over $300k. This means that if the property is held the full thirty year term, the mortgage would be paid, and the investor would have collected almost $1.1m over the thirty year term, after selling the property. Even after discounting the original total investment, there is still a profit of $800k.

But, the real magic is in the leveraging. In this example, the investor fronted less than $80,000 and ended up with over $1,000,000. If one actually spends a little more for a property that doesn’t need as much renovation at the beginning, one may have a better total return.

Putting together a good team

Any good investor needs partners. These are the people one needs to have available:

Real Estate Agent- A good agent will know what is on the market. The agent should be able to help minimize the initial costs, while making sure that the property is suitable for renting, and will be readily marketable for that purpose.

Rental Agent- Knowing what a given property can rent for is valuable information. Also having someone ready to market the property as soon as practical is valuable to cut down non-productive time.

Inspector- Spending a few hundred dollars for a good inspection is money well spent. Missing a failing HVAC system or a roof issue could cost thousands. Knowing that a particular siding or electrical has shown itself to be unreliable can also be very valuable. If one can find an inspector that will give good cost estimates of repairs and upgrades that need to be performed, one may be able to cut down on the number of contractors that need to be consulted prior to buying a property. The inspector can also provide invaluable insight into the long-term viability of the expensive systems in the property.

Mortgage Loan Broker- Unless one is going to owner/occupy the properties for a number of years at the beginning of ownership, one needs to work with a mortgage broker that understands investment loans. Structuring the loan appropriately for the investor can decrease the monthly costs, and increase the cash flow of the property.

Rental Marketing Strategies

The whole point of this exercise is to get the property rented and keep it that way. There are a few things to keep in mind to maximize the long term return, and minimize risk.

Hire a good rental agent. They are part of the team. A good agent will help get the right exposure for the property, as well as make recommendations that will make the house more marketable. These are specialists. Depending on the individual agency they are with, there may be a one-time fee or they may be a monthly percentage.

Stage the property. A vacant house makes it harder for renters to mentally move in, just like buyers. A few rooms that are well staged will really increase the value in the minds of renters, so it is generally well worth the cost. This is especially true for higher end homes, but may be the thing that tips the balance for ANY property. With rentals, this may be a real standout, as few rental properties are staged.

Set rent appropriately. To get, or more likely keep, a good renter, be flexible. A good renter can cost less money between rentals. If it is a longer term renter, there will be fewer vacant periods.

Be flexible on lease/purchase possibilities. I have heard that about 1 in 8 lease purchase sales actually close. If offering a lease purchase is what it takes to get a good renter, or to keep a good renter, remain open to the possibility. It may be well worth the risk that the property may sell. Also, if the buyer/renter would like some of the rent credited to down payment, most lenders require that only an amount above market rent be applicable to down payment. Usually this money is forfeited as earnest money if the sale doesn’t close.

Research. Plan. Prepare. Remember the old adage that it takes money to make money. This holds true in buying real estate to hold as well. Targeting the money is less important than in flipping, but spending it appropriately is still important. Also, understand your own market and your own limitations.

Answers to questions I can't answer

I've been asked a question about a particular area that I just couldn't answer. Ok, I could answer, but at the peril of losing my license. You know the questions.

Here is another tool in the arsenal I give to clients to find out before moving what the pitfalls and pluses are regarding specific areas.

City-Data.com

I've found that it is better than a lot of other forums. Of course there are people on there that are alarmists or apologists, just like any other member driven media, but if your clients are able to look past the extremists, they should be able to see some good information.

As a real estate agent, there are things that I can't do. One of the stickiest is called steering. Basically, this means that a client is only shown property in a certain area, or not shown property in a certain area because I think it would be more comfortable for the client. The reason that it can be sticky is, as a real estate agent, we are often asked by our buyers to only "show houses in _(insert racial/religious/cultural/ethnic/other group identity here)_ type of area" or "don't show me houses in ..." blah, blah, blah. You get the idea. If I comply with that request, based on the language of the request, I can lose my license. Can you find an agent that will do as you've asked, based on that or a similar conversation? Absolutely. But, it won't be me.

If a client asks me to show them homes in a particular subdivision or neighborhood, I CAN do that. But, the toughest question is "Can you find me a home in a family friendly subdivision?" It's tough because it is a technical violation of the ethics rules of the Georgia Real Estate Commission for me to used familial status as a determining factor in selecting homes to show. However, the way I would handle it is to ask questions... legal questions. The first one is"

What do you consider family friendly?

Based on that, we can find the right house. We can talk about schools, recreational opportunities, traffic flow, and other factors.

Luckily, there is no danger in telling me you want car friendly neighborhood. Neither car people, nor non-car people are protected groups... yet.

July 2007 Market Report for Gwinnett County

Gwinnett County sales comparison for residential real estate. 7/07

It time for me to make my prognostications for the coming market, while recapping that which has happened. Please keep in mind that even on the 14^th of August, the numbers for July WILL probably change. I will come back and correct them before posting the September results. I originally posted the June number on July 10^th, and they had changed pretty significantly by August 6^th when I reviewed and corrected them.

I see a solidification of some of the trends that I pointed out last month. Listings are up vs. last year by 13%, same as last month. This is actually trending down slightly when trended over a three month average. However, I still think we are going to see an increase in troubled properties in the next few months, and continuing for the next 9-12 months. Sold listings and pending listings are still dropping as a percentage of new listings and vs. last year. The trendlines are also pointing solidly down. Not good news…

Prices are pointing up, but I don’t think that will continue. I think we need to see a drop in prices to spur buyers into action. I don’t expect that to be much, but a modest decrease of maybe 2%. Currently we are up 5% vs. last year. June was up 4%. This might also be partly a function of some of the new home sales on the higher end of the market.

Time on the market is also trending up vs. last year. We are up to 82 days. That is almost 2 weeks more than this time last year. Last month was 79 days on market, but that was also 15 days more than June 2006. May sales were the lowest this year at 76 days on the market.

Those outside influences are still at work, and there aren’t a lot of changes from last month… but there is one that is huge. Last month I mentioned an increase in foreclosures as a result of poor financing decisions by buyers over the last couple of years. But, that has almost become a side story. It is still quite true that there is a veritable flood of foreclosures that could be looming on the horizon. However, I think the biggest influence on the market is the current mortgage climate. Feel free to look at last month’s report to see everything I said about foreclosures.

The current mortgage climate is tough. For buyers with weak credit history, the market is almost closed. Alt A loans (stated income, no documentation) will be away from the market for the foreseeable future, except for the rarest of good credit buyers. And expect that 0% down and even 3% down loans will be reserved for those with better credit.

Overall, this is decreasing the pool of buyers in the market. But, the quality of serious buyers will be improved. This is going to tighten the buyer’s market even more for at least the next few months. As we move toward fall and winter, when fewer homes are traditionally on the market, there might be some easing for sellers, but not much. We’ll have to wait to see how this credit crunch shapes up over the next few months to see how it will affect sales next spring. For more on this, take a look at my posts on the housing bubble, and interest rate predictions. I stand by my opinions regarding flip opportunities from last month. I have also gone a little deeper into flipping here and a bit of an investing primer here.

Finally, remember that we can only get an accurate look in the rear-view mirror. We will only KNOW there has been a change in the market when we see it has already changed. We’ll know that change has taken place when we see all of the best deals are already gone.

Since I previously brought up the FairTax...

Since I brought it up, I figured I should post up how I believe real estate would be handled.

The tax is only on new items and services. So, obviously new homes would be taxed. The tax would be included in the sale price when the home is sold the first time. Under the FairTax, the rate is 23% (inclusive), so that means if the taxed price is $300,000, the house is $231,000 and the tax is $69,000. Opponents of the tax like to paint this as actually being a 30% tax, and $69k/$231k is 29.9% so they aren't being totally dishonest... totally. What they are failing to mention is that they current income tax (which the FairTax would be replacing) is also figured on an inclusive basis. When we make $100,000 and pay a tax of $31,000, we are paying 31% inclusive, or we are paying 45% on an exclusive basis. This corresponds to the 23%and 30% quoted for the FairTax.

Back to the subject...

So, the $231,000 brand new home has $69,000 in tax attached to it. Sounds bad so far, right? But, as the house is built, there are no taxes being charged on the incomes of the builder or his sub contractors. There are no taxes being charged on any of the companies that supply products. Also, the buyer is getting their ENTIRE paycheck. If they make $50,000/year, they actually get paid $50,000/year.

Ok, that sounds a little better, but it looks like all of the companies are cleaning up... no taxes, so they make more money. Well, what happens when one builder lowers his prices because his costs go down? And, since the builders know how much their costs have gone down, do you think they will expect their subs to drop their prices too? And what about their suppliers? We all know that when one commodity producer lowers prices, ALL have to lower prices. When the gas station across the street drops their price, all of his competitors do too.

Used homes (we like to call them existing homes) would be unaffected by the tax. If prices go up for new homes (because of the included tax), the value on existing homes will also go up. Back to our gas stations... we know that they all raise prices within minutes of each other. But, as a side effect, conservation and recycling will be positively affected. Although, building supplies for retail (DIY) would be taxed.

But, how will it affect real estate agents...

Well, we won't need an accountant to figure out our taxes. The money we spend for business would be without the tax. The money we spend for personal things would be taxed. If I buy a new laptop for my business, I don't have to pay the tax (or I can get it refunded). If I later sell that laptop, I would have to collect the tax on that sale. Same for a new vehicle. We won't have to pay Federal Income Tax, Self Employment Tax, Medicare Tax, Social Security Tax, Inheritance Tax, etc. Get the idea? Our cost of doing business would go down. However, we would have to collect the sales tax (actually our brokers would). So, if we received a $10,000 gross commission, we would get $7,700, and $2,300 would be paid as tax. Personally, I can honestly say that I would absorb the cost of the tax. I wouldn't be paying income taxes and other taxes, and I wouldn't have to have an accountant for tax purposes (I would be using my accountant to figure out ways to make me money...). I can honestly say that I think I would net more money after taxes and tax compliance costs with the FairTax than under the current system.

Local Real Estate Forum for Buyers, Sellers, Investors, FSBOs and others

You know, every once in a while, I have a "duh! Hello!" moment. Today was one of those days.

Back at the beginning of the year, one of my mortgage brokers and I built a forum on my website. Our goal was to provide an arena for buyers, sellers and investors to pose questions to others and to real estate professionals. We also wanted unrepresented sellers (FSBOs) to have a resource that they could use to get information about the selling process.

It took a lot of time, and when we jumped out of the gate, we figured out that getting traffic was going to be tough... and it has been. We've had some traffic, but not the level it needs. So, if you have questions, or comments, or want to share your experiences, feel free to drop in. Here is a link to the forum.

I've also decided to open the forum up to Gwinnett area neighborhoods (I'm actually open to other areas of the Atlanta metro, too). If your subdivision, or neighborhood would like to have a private and/or public forum area, let me know. I can set it up, and allow password only access to your area. Unapproved parties will not even see that the area is on the forum. It can be used to post news, minutes from HOA meetings, postings about neighborhood garage sales, etc. Of course, there is no fee, and I obviously can't make you use me as your real estate agent.

Take a look. If you have any questions, I'd love to hear them.

It's time for the IRS to GO!

Well, if you've wandered around my blog at all, you've probably figured out that I am opinionated, and libertarian in my views. I have tried to keep my political opinions out of this blog, but I heard something today and it just chapped my hide... I can't take it anymore.

Some of you might know that Barry Bonds recently knocked out the home run that puts him in first place for lifetime home runs. A young guy caught the ball... and he might have a serious problem. I can't tell you much about him, except that I've heard he was a college student. But, he might have to start looking over his shoulder for the tax man.

Some experts are saying that the IRS will be looking to collect a bit over $200,000 from him for catching the ball. You see, experts think the ball is worth about $600,000, and the $210,000 is the amount of gift value this guy received when he caught the ball. So, if he wants to keep it, he'll have to cough up the cash. it doesn't matter if he would never sell the ball... the IRS would say that he has already received the value... and it is income.

It is time to adopt the FairTax. We need to get back to a point where taxation is something that can be understood. If you aren't familiar with the FairTax, please go to the link and read up. It is the most studied article of legislation... ever. It would make our live a LOT easier. Think of what you pay for tax prep and accountants to get ready for tax season. Think of the time you spend in tax prep. And, think of the consequences if you make a mistake. And, despite the fact that the IRS itself can't consistently answer their own questions correctly, making a mistake at some point is likely.

It would make life easier for us, for our buyers and sellers, and even our builders.

Eminent Domain Abuse

This should be one of the keystone and defining issues for the NAR. I know that the NAR and some of the state associations are working (too) quietly to curb governmental abuses of the Power of Eminent Domain.

If you are unfamiliar with Eminent Domain, it is the power that governments of various levels have to condemn private property for public usage. Don't be thrown off by the word condemn, it has needn't have anything to do with condition of the property. Some examples of non-condition related, proper eminent domain would be property needed to build or expand roadways, public schools, or other needed institutions, like fire stations, police stations, etc. Occasionally, eminent domain is used to correct a blighted area. However, that has not been that common, and usually involved abandoned property, rather than taking property from an active owner.

But, in the last decade or so, there has been an acceleration of governmental use of the power of Eminent Domain. Often, this hasn't been about roads, water facilities, police and fire stations, or other legitimate public uses. It has been stretched by courts and governmental authorities for such purposes as shopping centers, more expensive homes, high rises and other private uses. Just do a Google Search for Eminent Domain Abuse. Oh wait, I did... The Castle Coalition has an interactive map that allows one to view highlights (lowlights?) of abuses by location. Here are a few from various sources.

From CBS News:

Jim Saleet worked in the pharmaceutical industry, paid off his house and then retired. Now, he and his wife plan to spend the rest of their days there, and pass their house on to their children.

But Lakewood's mayor, Madeleine Cain, has other plans. She wants to tear down the Saleets' home, plus 55 homes around it, along with four apartment buildings and more than a dozen businesses.

Why? So that private developers can build high-priced condos, and a high-end shopping mall, and thus raise Lakewood's property tax base.

The mayor told 60 Minutes that she sought out a developer for the project because Lakewood's aging tax base has been shrinking and the city simply needs more money.

As much as I hate to pile on Wal-Mart (nobody is forced to shop there, people do it because they want to), they have been at the center of more than their share of Eminent Domain cases.

From Reclaim Democracy:

But if the city of Denver has its way, these small businesses will be evicted to make way for a Wal-Mart super-center. The city's Urban Renewal Authority has threatened condemnation if the property owners refuse to sell and has offered Wal-Mart $10 million in public subsidies.

Wal-Mart leads the pack in attracting subsidies, this year collecting $10 million in Denver; $500,000 in Dallas; $36.7 million in Scottsdale, Ariz., (as part of a shopping center that includes Lowe's); $9 million in Bartlesville, Okla.; and $17 million in Lewiston, Maine.

Just wander around that search and you'll some surprising things. The most important reason the NAR needs to be involved is that we represent people. And these people are buying their dreams. What good is buying the dream if the government can come along and decide that they can get more tax dollars if they just take away someone else's dream?

I'll step down from my soap box for a few minutes now.

I called this one a month ago...

I just got today's REALTOR Magazine Online Daily Update. This was one of the stories that was featured. It is about how foreclosures are up. They make up 10% of the listings in CA, as opposed to 1.7% last year. But, at the same time, distressed properties aren't listed at much of a discount compared to other properties.

A month ago, I posted this update for part of my area. If you struggle through to the end, you'll see this passage:

Foreclosures will start to get more attractive if the lenders start to get realistic about the prices. I see many of these homes priced well above comparable homes plus needed renovation (even with free labor). Until the prices on these properties drop down low enough to allow rehabilitation, these properties won’t sell in any significant number. There are some that are selling, but not to experienced investors or “flippers”. A good example is a home selling at $175k in a subdivision that should net $185k - $200k. The property needed around $20k in renovations to bring it up to area standards, not including most labor. A possible $5k profit is not sufficient for an investor to consider the property. That limits its market to investor/occupants. As the number of foreclosed properties increases, these limited buyers will dry up.

Did I call this one?

When the REOs start dropping, they may start moving. Right now, the banks still think they can get the money out of them that they are into them for, despite the fact that they are over-priced and under-quality. I think when we see a bunch of the REOs start to get attractive, we'll see more balanced listings/solds ratios.