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2010- What can we expect in real estate?

It is so difficult to sort through the mixed news that we have about the industry. First, there are reports that sales have increased, and the rate of foreclosures are decreasing. However, we have reports that now we are facing a new crisis that could be affecting commercial real estate.

Now, the government has extended the tax credit, and the Fed is keeping the prime rate low, which should be good for buyers.  With all these mixed signal, you have to be a fortune teller to make sense of all these signs.

In my humble opinion, there will be opportunities; but they will have to sifted through. The easy deals of the past are not easy to find.  To me the great investors are the ones that have easy access to capital, but even more important then the capital will be their access to the teams to help them capitalize on these “diamond” in the rough properties.

Many of these properties will be turnaround situations, which will require competent management teams, realtors, contractors, handy men,etc. to truly make those situations profitable. There is a reason that a property is selling for below market prices, and sometimes investors over look this fact. People need to quit believing that money is risk free easy money.

Obviously, there are good deals with the number of deals in the market. The key to a deal is execution once the property has been targeted. This requires good people to get a property ready to either sell or lease, as well as the right teams to help you market your properties once they are ready. 

Many investors often underestimate or downgrade on the importance of these professionals who provide these services, but the fact is that without those quality individuals helping that a property investor will fail miserably to execute their flip or lease strategies.  

Another key issue is not determining quality just on the basis of price. As the axiom goes, “you get what you pay for”. Vendors or professionals who do not base service on price alone should be discounted. The value cannot be only measured by the short term outlay, but it should be evaluated in the context of the bigger picture.

Next year will be a great year, but only for those people ready to build teams to take advantage of these conditions. It is very difficult for owner’s to understand that you should not always be a jack of all trades, but a master of none.

Why does it feel like the economy took one step forward and one step back?

I have been reading some various economic indicator that indicate mixed signals. Officially, our economic output as measured by GDP grew, but we also experienced around a 4% decrease in new home sales as well. With all of these mixed economic indicators, it is very difficult to feel like celebrating that economist say that we are turning around from the recession.

What are the drivers of this growth? Why do I see news clips stating that Shells plans to cut 10% of its workforce, and the market took a beating after rallying quiet bit.  When the economy recovered from other recessions or dips, it was easy to see where money was flowing.  Housing is flat. Technology is flat. Banking has tight lending so well capitalized small business owners are not a reality in this day and age.

Without the clear indicator of these growth engines, it is very difficult to feel enthusiastic. Maybe the growth is from the health care industry, since more people probably got ill just looking at the job prospects. Also, if the health care spending is increasing, then is this not the issue that people point to is a cancer to the other industries in America? Why should anyone outside of healthcare people be happy that more money is pouring into that industry? I thought the whole point of health care reform is that health care consumes too many dollars of the US economy. Therefore, this is not the bandwagon to cheer about, while Congress is debating to reform many of the items leading to the explosive pouring of money.

At this point, I really do not feel comfortable that the growth is based off a sustainable model. The commercial industry is supposed to be the next wave of foreclosures due to all the empty office and commercial spaces. Where is the growth coming from?

If it the stimulus plan, then conservatives are going to blast that kind of growth as “Communist”.   Also, since this spending is based on deficit spending, this could be injurious to the long term health of our economy with inflationary risk.

I am not pundit on television or a pure economist, but I feel like I am a educated person trying to put my fingers around this data.  It just feels like we are standing still. Maybe with all the bad news that people get, then this is reason to celebrate?

1st Time Home Buyers Market- Pot of Gold for buyers especially till November 30th

I know it has been a while since I posted on the site, but it has been a hectic time in my personal life. However, I am definitely going to make a more pronounced effort to keep my viewers more informed about my random insights of real estate (now that may not be worth much, but I gotta keep my audience entertained!).

Normally, I am more grim about the market, but I have been a helping a few new home buyers find homes which has me seeing a really positive trend in this mark that for them it is a good market. As investors and speculators continue to be shut out of the market (except for those who are in solid cash position or ready lines of credit), this market really could be a solid market for newbies.

Everyone has heard about the tax credit, but it is worth mentioning again. If you are a first time homebuyer, you can get a $8,000 tax credit if you close before November 30th. This would be a nice chunk of change to get on your tax returns. Couple these incentives with a article that I read in the Chronicle from Nancy Sarnoff at (www.Chron.com) that 1 out of 4 sellers in the United States have slashed prices. This means that prices are either decreasing or stabilizing right now, and this could be a nice entry point for homebuyers. These are two particularly strong force that are converging together at this time.

Now, my wife and I are refinancing our home, and I can see the final part of this perfect storm- interest rates. Rates are low for first time home buyers and primary home mortgages (investors- not such a good time), as rates are around 5% in many banks. This means if you can afford a payment that you will enjoy great payment terms. I do strongly urge that people make sure that they understand their payment terms on any loan. You should consider 15 year, 20 year, 30 year mortgages that are fixed as most people are easily able to understand what they are getting into. Now, I know that there are investors or savy investors who can take advantage of Adjustable Rate Mortgages, etc; but I am not one of those people. I stick to easy to understand programs to avoid issues later on that I will regret.

Now, lets review: 1st Tax Credit for First time homebuyers, 2nd Prices are falling, 3rd Low interest rates. Maybe, there can be a silver lining through this real estate downturn for some people. As they say after a storm, there is always a rainbow. The end of this rainbow is not a pot of gold, but a 2000 square foot home with 3 bedroom and 2 baths for lucky people.

New Home sales are down 33% from prior year, and there could be a silver lining!

I was reviewing a article that said new homes sales are down 33%. The interesting thing is that as bad as those figures sound that I am actually shocked that the numbers are not lower. In prior years, credit was easily accessible. Today, instead of focusing on the negative news, I will change roles and analyze it from the cup half full perspective.

If banks are not lending in this credit crisis, and people are losing their jobs; then who are buying all these homes? Our natural inclination in these times is to assume that the economy has ground to a halt, but I think that this helps put in perspective that even in the most dire economic straits that the US economy still keeps running.

66% of home purchase could not have been bought by investors, so this indicates that even in these bleak hours some people are finding great deal. They must have tucked some serious cash under their mattresses, but it worked for them didn’t it? As many realtors and real estate experts say, this is a time to buy for those fortunate enough to be in a position to do this.

We are in the longest recession since WWII, and yet our real estate industry has only been knocked down 33%. I was not alive in WWII or a historical economist, but from what I learned in class; WWII nearly brought the US to a stand still. This means if this is the worst that we are facing, then this country will survive. As they say, “This too shall pass.”

Appraisers are doing their job, and its hurting sales

The Houston Chronicle did a story about appraisals are killing home sales, but I wonder why it is such a bad thing?

Appraisers are now appraising below agreed upon sales based on their analysis.  Brokers are stating that they have multiple offers coming in at a price, and this should justify the appraisal. However, the appraisal process is not driven by potential deals, but instead  they are evaluated by recently closed ones.

When appraisals are being targeted based on potential deals, there is less accuracy. It cannot be evaluated whether those person would qualify for the price that they are offering,etc.

Construction cost or comparable sales are better indicators of historical value. This is what banks are looking for to make hard decisions.  Prices were over inflated over the past decade due to easy credit and sales persons pushing up values. When a properties value is not in line with cash flow analysis for rentals there are deeper issues to consider. Does a property whose cash flows exceed rental values have factors that make it only valuable to home owners and not as a investment?  Is there  a historical basis to the property? Is there a sentimental basis for the high valuation?

If there is not a reason for the excessive values, then why does the property value get to go higher? In Texas, we have so much land that people keep moving further out.  This means that buyers can find a substitute value, and this hurts reselling homes in suburban areas.  Only a paradigm shift caused by high fuel values or similar kind of similar factor will cause this substitute to remain unattractive. 

Until more buyers value, “green homes” or lower commute time or fuel cost; then you will continually have issues.  People could argue that the offers prove that the home is valued at the offer, however there is no evidence provided that those offers are made by savy person with a full range of information. To truly accept that the market place is working correctly, the buyer and seller have to have a free flow of information. What if the agent did not do any research on comparable market values? Is this offer really a good offer?

People are going to suffer in this real estate environment, but as I have noted before; we have to take our medicine to get better for the long run. If the appraisers are doing their job based on unbiased information, then why should we fault them? We were mad when they did not do it, so lets applaud unbiased analysis.

I Bought A Property Cheap, But Can I afford to Repair it?

My property management firm (www.AshokaLion.com)  often  finds investors ill prepared to understand the risk of owning real estate.  One of the most difficult concept that owners struggle with is that properties maintenance is expensive . 

The price of a property is directly related to a few key factors: 1) Location 2) Appeal of home 3) Maintenance issues.   When you find a great deal in this market, the reasons often relate to one of these factors. For example, if your home has a lot of deferred maintenance issues; then seller may have to discount the price for these repairs. If a investor finds a “cheap” deal, there is often a reason for this.  This is why investors have to understand the risk involved with buying real estate. My remodeling team often come across many investors who fail to appreciate this risk prior to buying property. Tradesmen (electrician, plumbers, HVAC, carpenters) are not cheap. You may find vendors who will promise low prices, but you could compromise quality or reliability for false promises.   Desperate investors lose sight of that age old adage “You get what you paid for”, when they get properties with extensive repair needs. 

Trustworthy vendors and quality work are done by true professionals. This means that you may not always base these decisions on the cheapest bid. Investors should do their due dilligence with vendors. Do they have insurance? Are they licensed? Do they conduct themselves in a professional manner?  Do they seem knowledgable in the work that you are requesting?

It is great to get a property cheap, but you must be prepared. First, estimates do not always come cheap. You may get a vendor to come to provide a bid for free, but they will not come repeatedly if they are not getting the work.  Second, you should let the vendors bid for projects without knowing the other projects. Contractors may accept a bid lower then normal just to get the project. However, cost could “unexpectedly” increase or they may not provide you their full attention because the margins are too low on the project. There are many horror stories of vendors who leave a job midway to take a better paying project.

Ownership of investment property is a great thing, but owners must strive to understand the business of real estate. Nothing is free.  Proper perspective will only help investors  and future homeowner make wise decisions with their money.

If we build it , they will come- Yea Right!

The latest construction figures for Houston ( supposedly) a good market is down 53% compared to 2008. This is both a statement about over building. It also indicates how tied our economy became to housing and construction. It used to be that good jobs and schools attracted people to live in a area.

This model would generate positive development of a area if those two criteria were prevalent. However in Houston, it was like someone was playing the motto from “Bull Durham”- If you build it, they will come.

Neighborhoods sprouted up while lending was easy. People would move further and further away from downtown.  After enough of a mass had developed, large strip malls and shopping centers appeared to support these fledgling communities. Eventually, the area had enough of a nucleus to support the development of entertainment areas (Sugar Land Town Center, Woodlands, Kemah), and this areas helped reduce the need for people to leaves these booming enclaves.

Somewhere along the way, the logic was twisted. Jobs or great schools were not driving the migration, but it was simply the access to cheaper homes.  In my opinion, the fundamentals of sustainable communities were now being driven by the migration versus business development. Our growth was built on building more homes and all the associated industries related to this field (lending, furniture, trades people,etc). 

This is why our recovery seems have a circular analysis, as the job market was being driven by this consumerism.  We must pump the consumer to spend more money on goods that they may or may not need. However, it is that spending that lead to the debt that they cannot afford. This mindset spurred the real estate binge, as it was simply the new easy to get item. Homes replaced the Home Shopping Network for easy to find deals. 

 The development of new industries or innovations has not been driving the growth of this country since our dot.com bust in early part of the decade.  Instead our growth was simply driven by our want for new stuff, and a fundamental denial that we would have to pay it off.  If we had developed new medicines, technologies, industries; then maybe the growth would be more sustainable. This must be what analyst refer to when they say “good job” growth.

Tonight, I may watch Field of Dreams to see how we can find a clue to get out of this mess. I think it had a happy ending.

Houston’s market is healthier in real estate then other real estate market. Why does this not seem so uplifting?

You know I have read report stating that Houston’s real estate market is considered one of the healthier markets. I can understand this for several reasons: 1) energy industry 2) world renowned medical center 3) Low cost of living

Forbes noted in January 2009 that Houston was a strong real estate market. Why does this not seem to be up lifting? However, when you look into the analysis, we still have a negative growth projection.

This is like being in a “Least Ugly” beauty contest. It is not that you are not Ugly, but you are less ugly compared to the other competitor.

Houston’s market as noted by Houston Association of Realtors shows in February that sales fell over 22%. This is just a sad fact of how data can be spun. We are strong, but still have 22 to 26% decrease in sales.

However, it should be noted that rental rates increased for single family homes about 5% and condos rental rates increased by 17%. If you are a investor, you may have to evaluate your purchase with a longer term exit strategy. The quick dollar is not a strong play in this market. If you build a portfolio of rental cash flowing properties, then you will be better served.

We may be the one of the least ugly contestants in the real estate market beauty contest, but this just means you will hate to date a loser of this competition.

Saving millions from foreclosure..but how did we get there?

President Obama revealed a plan to save millions of homeowners from foreclosure. His plan involved two componennts: 1) Modifying payment plans 2) Allowing refinancing for properties that are now below value.   The fact that nine million homeowners are possibly going to be saved by this plan is a sign that market devaluation occuring right now is a market correction.   Moreover, this indicates to me that what drove up prices was the influx of demand with little insight into what the “full cost” are entailed in homeownership or investment.  If you understood the risk of buying property, you may not have paid those prices.

I have often seen real estate agents and mortgage brokers provide a cost analysis to the buyer that did not include a “full cost” analysis.  This is not to say that they did not provide the required disclosures, but what I am referring to is a deeper analysis of their clients or the situation. 

We speak from experience, as my property management firm has lost over 40% of my investor units to foreclosure.  Many of our California investors bought property with little insight into the “full cost” or were not prepared to handle a down market. 

What I mean by full cost is that the investors who bought did not fully contemplate their cost of property taxes, insurance, management, and repairs. Additionally, all cost assumptions were based on top end rates for rentals and 100% occupancy all the time.

As I  am a investor and real estate agent, I try to often warn my clients of the difficulty of investing. I do not believe that it is good strategy to oversell or be overly optimistic.  This kind of sugar coated thinking by many in the sales arena (agents, lenders,etc) may have deluded individuals.  People automatically assumed properties would appreciate or rental rates would increase. Additionally, they assumed properties would rent at the highest rent for a area without factoring in the local area factors (Schools, Neighbors, Neighborhoods,etc) all play a role in rents achieved.  

Full cost of a property include slow market conditions, repair costs, slow paying tenants, or tenants who are not careful at the property. Investor sometimes feel that there is a problem with the management company if tenants do not pay on time, however people who are late dodge the property management firm’s calls. Management companies or land lords cannot force payment a la Soprano style, and this means finessing out payments.  Other than screening for rental history, credit history, or income verification, there is no crystal ball to know if a tenant is clean or if they will be noisy,etc. These are only issues that can arise after the fact.  To remove these tenants for those violations would require evictions, which most owners would have to bear the cost of dealing with.

Investors who do not have the ability to absorb these issues should either revise their budgets on the type of investment to pursue or stay out of the real estate investment market.  A business is not guaranteed success, and investors should not beleive that real estate is guaranteed either. If it was guaranteed, then everyone would be doing it.

Wait! Everyone did try to do it (Damn!).  Now, we are all suffering for those delusions.