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.