Rents Are Rising, Time To Buy?

Posted on April 6, 2011 by Tim Freund

About 6 months ago I was challenged by a reader to prove it was cheaper to rent than to buy, something I stated right here in TheRealEstateConversation.com.  My point then was that you needed to factor the costs of home ownership in terms of maintenance against those of renting.  I still advocated buying, but not based on the cost comparison.  However rents are rising.  Why are rents rising? – simple, increased demand.  Demand is coming from several places; an improving workforce for one.  As the economy improves, 20-34 year olds are moving out of their parents’ homes and into apartments.   It is also coming from those distressed sales we see every day.  Short sellers and foreclosed homeowners have no choice but to rent since their credit is shot and even after they’ve rebuilt their credit, they lack the funds for a down payment.  So what then does this portend for the housing market?

Conventional wisdom would suggest that the housing market will by default improve because more and more people will conclude that owning is cheaper than renting.  That equity building, leverage and the chance at the American Dream are reasons to test the waters of this choppy and unpredictable housing market.  In fact, it is a logical that as demand pushes the cost to rent upward, buying will look more and more attractive.  And I believe that conventional wisdom is correct, but the question remains, when?

Dan Hamilton, economics professor and team member of the Center for Economic Research and Forecasting and at California Lutheran University in Thousand Oaks, Ca, has suggested that the shift away from home ownership is a positive thing.  He reasons that home ownership levels exceeded historical averages and until we get back to those averages, about 65%, we will continue to experience defaults.  As a professional observer to the real estate market I believe that the defaults/distressed sales are in large part already within the system.  It’s frequently referred to as “the shadow inventory”.  Naturally any rebound in housing is predicated on a continuing improving economy, but if renters and first time buyers start entering the market, they will offset the defaulting properties.  Moreover we are seeing investors, largely all cash buyers; absorb more and more of the slackness in inventory.  Locally, the Conejo Valley has seen a decline in distressed properties for sale from 30-35% down to 17%.  Yes, we are still hearing the foreclosures are coming, and yes there are many people underwater on the loans or even those who haven’t paid a mortgage in 2 years, but still in their homes.  Further, today’s restrictive lending standards are preventing large segments of the buying population from buying.  But these are the factors that are conspiring to achieve Dan Hamilton’s 65% target home ownership level.

So back to the original question, with rents rising is it time to buy?  Yes it is.  Is there risk in buying?  Not really; not if you consider your real estate purchase as a long term investment: five years or longer.  Thinking that you can make money or break even in less time is less about home ownership and investment than it is about speculation.  Is there risk in renting?  Nope, but there is lost opportunity cost, and unfortunately, that cost can only be calculated through the hour glass of time.

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Should You Hire A Buyer’s Agent?

Posted on April 2, 2011 by Tim Freund

“I’d like to see your listing at 123 Such and Such Street.  Can you show me?”  I get this call now and then.  In fact I handle transactions for both buyer and seller a couple-few times a year.  As a Realtor, it’s always a little exciting because of the prospect of “double siding” the transaction – that is, representing both buyer and seller, because I potentially get a double commission.  But when is it really to the benefit of the buyer, or seller for that matter, to be in a dual agency?

California is one of the states that allows dual agency – where the agent can represent both buyer and seller in a transaction.  This is allowed providing both principles are aware that the agent is working for both sides.  If the agent fails to disclose this fact, it is called “divided agency” and is illegal.  You can easily imagine the advantage one side would have if the other side was unaware of this relationship.  However, just because dual agency is legal, is it a good thing?  To that, I say, “That depends”.

First, dual agency can be very hard on a real estate agent.  It’s a fine line to walk between equal representation between two parties.  In this relationship the agent must maintain a fiduciary responsibility to buyer and seller, meaning that confidentiality, a duty to disclose, and fair dealing and in good faith, are requirements to both sides.  He or she must provide their best counsel while at the same time not give anything away that they know about the other side, without express permission from the other side to do so.  But how can an agent do this and back to the question, how can it be a benefit?

Much depends on the market. Let’s start with the obvious.  In a boom or seller’s market, it’s a benefit to the buyer because they get an inside track to a hot property that only the listing agent may know about.  The seller benefits because they get to sell quickly without all the hassle of showings.  Does the buyer over pay or seller under sell?  Perhaps, but you can fairly say this on  any transaction.  How does anyone ever know if the seller would take less or the buyer pay more?

In a balanced market, one which favors neither buyer nor seller the same explanation applies.  However, during a buyer’s market the dynamic becomes much more difficult.  A seller clearly benefits because they sell faster with less hassle.  In fact this is often the criteria a seller will use in hiring the broker to represent them – does my agent have a potential buyer for my home?  But the buyer’s situation is considerably different.  They have to ask themselves, “Is the agent representing the seller really going to be willing to “grind” the seller on price?” and “Will they really represent my best interests if they have a stronger, longer term relationship with that seller than with me?”  Herein lays the real question: when is it best to hire a Buyer’s Agent?

In my opinion, it is in this kind of market that a buyer should most likely consider separate representation.  I am not saying dual agency can’t or doesn’t work in this situation, it can, but I suggest this works best when your agent “happens” to have the listing you want rather than a buyer’s direct contact with a bunch of listing agents directly.  By definition that means you must have an agent representing you already.  The idea that you can go “directly to the source” and get a better deal in this market is very suspect for all of the buyer questions I’ve already posed.   Sure, the agent might work a deal; reduce or rebate some of their commission since they’re doing both sides, but you have to ask yourself this question: if I potentially can save 1/2 to 1% of the sales price by going direct, is that more or less than my own agent would get by stern, hard-nosed negotiations on my behalf?  In other words, if I can save $4-8K on an $800K home, is that actually more money than my hired agent would otherwise help me negotiate for?  You can see when you look at those relatively small numbers, that the answer is far from clear.

Let’s look at today’s market and see how the above might apply.  First, what kind of market are we in?  Most buyers would answer a buyer’s market, yet for many areas, this is not 100% accurate.  Why? – because the competition for bargains on high quality homes is extremely high.  Let me repeat: the competition for a bargain on a high quality home is extremely high.  Are you trying to buy that REO with a view? – prepare for multiple offers.  Same is true for that insanely priced short sale.  Are you better served then by going direct? – perhaps, provided that agent can write your offer; (many REO agents will not or cannot participate in dual agency and many banks won’t pay a double commission to a short sale agent).  With REO’s specifically, keep in mind that a buyer is just one sale side and that most REO agents will be far more loyal to the bank they represent on multiple transactions than the one-off buyer.  In other words, don’t expect special treatment unless you’re family.  As a result, I believe in most cases you are best served by finding an agent to represent you who has your best interests at heart from the get-go.  Should they happen to get the listing on your dream home, at least then you will know them well and they you, and the stronger any relationship, the better you’ll be represented.

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New Home Sales: A Creative Cure

Posted on March 29, 2011 by Tim Freund

For several years now, the housing industry has struggled to boost interest in new homes.  Competition from foreclosures and distressed sales coupled with an oversupply of resale homes, has led to the fewest number of newly constructed homes on record.  In any other industry, developers would be seeking out new technologies and designs to stimulate interest, but not the stodgy housing industry.

Little boxes on the hillside,
Little boxes made of ticky tacky,
Little boxes on the hillside,
Little boxes all the same.

So goes the Malvina Reynolds 1962 song.  And here we are nearly 50 years later building the same boring tract houses.  What the building industry needs to do to revitalize itself is start designing interesting architecture for the average home buyer.  Technologically we are seeing some builders offering “Green” upgrades like solar panels and tankless hot water heaters, but what they really need to do is stop building Tuscan “wanna-bees” and look to Eichler, Cliff May, Frank Lloyd Wright  and Greene and Green for inspiration.  If you want to find buyers when there aren’t any, produce something that can’t be found elsewhere: see iPod, iTunes, iPhone and iPad for recent examples.

Imagine driving up to a new subdivision… maybe you’re a young couple looking to buy your first home, or an older couple looking to downsize or maybe you just want a new energy efficient home.  But instead of seeing a two car steel roll up garage door, red tiled roof-stucco box with stucco over Styrofoam covered trim, you instead see smoked glass garage doors, a low sloping roof line with a fenced entry courtyard concealing a wall of glass entry.  Maybe it’s a two story with an entry porch; a Stickley-looking oak front door and shingled redwood siding.

Builders will argue that land costs force utility over this type of style; that those products simply costs too much; that their margins are too tight and that the risk is too high to take a flier on some “funky” architectural design.  Don’t believe it.  Again, just look to Apple Inc.  People will pay for creative design.  Buyers will seek it out and find it.  Can’t be done?  Look at Ikea; who do you think is buying all that sleek Euro furniture?  It’s affordable, interesting and allows the owner to make a statement about who they are or who they want to be.  Have you ever noticed in the home section of any given newspaper, the type of home that is featured?  It’s never-ever little boxes made of ticky tacky, but rather it’s wood and glass, concrete and steel; it’s bold, inspiring and exciting.  If the building industry is going to help our economy recover, it cannot be business as usual.  Instead they need to look to design, look to form and look to function and in it, they’re union shall be their salvation.

 

 

 

 

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Buyers, Buyers Buyers…

Posted on March 28, 2011 by Tim Freund

I love buyers.  I enjoy looking at a lot of properties before finding the right one.  I don’t mind spending time on the phone going back and forth, over differences of opinion, discussing financing, and the merits or lack thereof of a given property; doing everything I can to help lead a buyer to a correct decision for them.  Lately however, I’m finding my buyer-clients are not listening to my advice as much.  Why is that?

I presume the problem starts with a lack of confidence in the direction of the real estate market in general.  Then it’s magnified by the over abundance of differing opinion available from their friends and much too much information on the Web.  It’s a recipe for a mess… think back to when you were a kid and you started making a chocolate milkshake in the blender when suddenly you got the idea that if you added mustard and pickles it might be better… oops, you lost sight of the original goal.  This is what’s happening with buyers.  Instead of simply buying a home, it’s now about stealing one.  Instead of evaluating the recent sales as a measure of value, it’s about anticipating the next ones and getting out in front of the market.  Instead of thinking of real estate as a growth engine for wealth accumulation through leverage, I am hearing buyers tell me how much less their home will be worth in 5 years.  This is a no-man’s-land of understanding and confusion.  As I grapple with this new, albeit I believe temporary reality, I sense the need to retrain myself: to be a better filter of information for my clients, while at the same time, careful to not to pander to them by agreeing at every turn, when I think differently.  This is the challenge we long time Realtors face: being able to maintain credibility with our clients, without alienating them, especially when they are convinced that they’re better informed than we.

 

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The Real Estate Perception Gap

Posted on March 22, 2011 by Tim Freund

Recently I wrote about the “Accidental Landlord” syndrome, where a seller ultimately concludes that it makes more sense to rent their property than to take an offer far below what they feel their property is worth.  In my earlier discussion the seller was under water on the property so their options were limited.  Presently I’ve got one seller who bought at the peak and is unwilling to walk away from the substantial money they put down and another who owns free and clear, has nearly doubled their money, but “wants what they want” for a sales price.  So in both cases, quality properties are coming off the market and converting to rentals.

So where does that leave the buyers?  Most of my buyers are terribly frustrated that they cannot find a quality home at a “realistic price”, and when they do, there are multiple offers and the competition is fierce.  Huh?  How can it be that buyers are losing out on multiple offers at the same time that sellers are removing their homes from the open market for lack of interest and offers?  I call it, “The Real Estate Perception Gap”.

The “Gap” is the difference between what the buyers, convinced values have to come down further and sellers, who won’t sell for less than what they want, see as fair market value.  This has led to a shortage of inventory.  Currently I would estimate that spread to be between 5-10%.  This is a problem.  When comps (comparable sales) are no longer accepted as a gauge for assessing value, what then is value based on?  Real estate 101 defines market value as what a willing buyer and willing seller agree to with the absence of duress.  But what happens to this model definition when there is duress all over the place?  Confusion, that’s what.  There is high competition for aggressively priced and highly motivated seller properties, and no action on everything else.   In sports we call it a draw; in real estate we call it a stalemate.  So until the distressed properties stop influencing buyer perception, or until they truly take hold and take over the market place (ie: Las Vegas and South Florida), “The Real Estate Perception Gap” will continue to cause sales numbers to decline and frustrated buyers and accidental landlords will grow in number.

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Should I Stay or Should I Go (part 2 of 2)

Posted on March 12, 2011 by Tim Freund

When I’m on a listing appointment where the seller owes more than the property is worth, and they lacks the hardship required for a short sale, the conversation usually ends up with the seller asking, “Tim, what are my options?”  My response usually begins the same, “Well, I’d like to see you avoid foreclosure.”  And assuming the seller wants to or needs to  avoid foreclosure, (do to security requirements for their job for example), then there are really only two options: sell it and contribute whatever cash is necessary to close, or rent it.  Thus the “Accidental Landlord” syndrome is born.

Most would-be sellers and especially those who’ve been relocated to another area due to a job change or corporate relocation really don’t want to be a landlord.  They recognize that due to their high mortgage, there will be a shortage every month that they’ll have to make up (the difference between the rent collected and the mortgage, insurance and tax payment); that the tenant could be hard on the home or worse be a nightmare and stop paying leaving them to pay both mortgages until they evict the tenant, fix the property and re-rent it.  Even if the worst case scenario doesn’t play out, there are bound to be repairs and vacancy between tenants.  They also have a new job, a family in the resettling process and since they live far away, how can they check on their property?  On the other hand, the thought of putting in tens of thousands of dollars to sell and close wasn’t exactly in the budget either – assuming they’ve the ability to do so.  Should I stay or should I go…?

So what happens to a seller like this?  In my listing appointment last week, I advised the seller that if he had the money to cover the costs to sell, he should sell.  Sure, if he kept the property long enough the tenant could pay off the mortgage for him and he’d be building long term security by holding on to his home as a part of a diversified portfolio.  But there are many factors to consider.  Currently his gain is tax free; (yes even though he now owes more than the home is worth, he still has a big profit from what he paid for the property).  Once converted to an income property, this benefit goes away and the profit is treated as income and taxed as long term capital gain.

He also has to consider his long term strategy.  If his goal is to sell as soon as he can do so without contributing money, he’s just holding on in the hopes of appreciation, right?  There’s really no other scenario in which he can benefit.  If prices stay flat or worse decline, he’s in even worse shape.  So how much does his home have to go up before he recoups the cost of selling today plus carrying costs?  First is the “under water” money he has today, plus the selling costs and commissions.  Then there’s the lost money of running a negative every month.  In other words, if he has to contribute $500 every month to the payment after rent, he incurs a $6000 annual loss.  How many years then, will it take for the property to appreciate enough to cover the shortage today and an annual loss of $6,000?   Using pretend numbers let’s say he needs to recoup 10% to come out clean, pay off the debt and cover selling costs, but he’s also adding 1% annually to that number because of the monthly negative.  You can see that in 5 years the property has to appreciate 15%.  If it takes 10 years that number jumps to 20% just to break even with where he is today, and then there’s the taxes owed on the gains.

Professional real estate investors never buy property based on a hope for appreciation, they buy for cash flow.  If a home doesn’t cover costs and expenses, they simply won’t buy it.  This is why I counsel the seller to sell if he can.  If however, he does not have the money to “buy himself out”, then he has no real option but to become an “Accidental Landlord” and carry the home.  Should I stay or should I go? Sometimes, you’ve just got to stay.

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Should I Stay or Should I Go (Part 1 of 2)

Posted on March 11, 2011 by Tim Freund

As a college kid in the eighties I loved the Clash.  Should I stay or should I go now… A lot can be learned from the poets and the artists of the world…  If I go there will be trouble, if I stay it will be double… even when those poets are teeth missing, tattoo covered British punks… This indecision’s bugging me...

Indecision; confusion; so much to think about… So it is with real estate these days.  Recently I have become the steward of the “Accidental Landlord”.  This is the homeowner who wants or has to move, either out of economic necessity or employer requirement (transferring), or just out of the desire to take advantage of the incredible buying opportunities today.

I did a listing presentation last week, in which the owner, a former high level executive for local company, wanted to sell his home.  He had pulled the equity out when a new job came up and bought another home in that city.  His family was finally ready to join him with kids graduating etc.  This meant it was time to sell his old home and he came to me.  I had to tell him that his home was no longer worth enough money for him to sell and cover the loan and costs. Therefore one of two things had to happen.  Either he would have to do a short sale, where the bank has to approve the shortage, or he would have to put in money to pay off the lender and cover the selling costs.

The short sale approach would likely require missing many payments and undoubtedly damage his credit.  I instructed him, that in my opinion, this was a bad strategy.  Aside from the credit damage incurred, I didn’t think he’d qualify.  Qualify?  That’s right, qualify.  If a seller has assets, a good job and no real hardship, why would a bank let them off the hook for the shortage?  The answer is they won’t.  I offered this perspective: you borrowed money to purchase a home after you relocated and now you have to pay back that loan.  Logical, yes, comforting, no.

Tomorrow (part 2 of 2): So what’s a seller like this to do?

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What Ventas Inc. Tells Us

Posted on March 1, 2011 by Tim Freund

Who?  I know that’s your first thought.  It was my first thought when I read about them last fall.  Ventas Inc. is a REIT (Real Estate Investment Trust).  Their singular focus has been the very rapid acquisition of housing for the elderly, including assisted living and senior apartments.  Here’s a number for you: according to the LA Times, Ventas has, since last October, spent in cash and stock (not including acquired debt), $15.8 Billion, and in doing so become the largest holder of housing for the elderly in the nation, and most of us have never even heard of them.

So what can we, the average homeowner and investor learn from Ventas?  Quite simply, we are getting older.  Duh, right?  But here’s my point: if you are a baby boomer homeowner or prospective home buyer, (1946-1962) or even one of the earliest Gen “X-er” (1963-1981), what is your next home going to look like?  If you’re a home builder, what are you going to build?  And if you are a real estate investor, what types of properties should you be looking at long-term?  If you are thinking single story, ding, ding, ding, you win.  Yet finding one, as I was once told by an older client of mine, is like “searching for hen’s teeth”, it’s tough.

Will any one story do?  The answer here is a definite no.  Consider the post WWII housing boom in which 1000’s of ranch and bungalow homes were built for the returning GI’s.  Will those be good for you?  Perhaps, but not necessarily.  For the older client seeking a one story, they are often not in the right locations and they are just so old.  But if you’re an investor, they make great assisted living facilities.  These homes are small; 3 bedrooms and 2 baths. But a bungalow like this is capable of handling 2-4 very elderly folks with a full-time rotating staff.  Location, as with all real estate is important. However, in this segment I would argue a little less so.  After all, if it’s the waiting room for heaven, does a little busy street noise really matter to the occupant?

What about those of us thinking about our last home purchase?  I would argue that this type of older home is not for us.  Rather, we want low maintenance, safe, close to nice shopping, maybe even gated.  In a word, we want newer.  Yet builders have not been building nearly enough single story homes.  In fact in many Southern California communities, builders don’t build any.  “Just like finding hen’s teeth”…

This challenge is also an opportunity.  If you can acquire a nice, newer one story, close to shopping and a hospital, not only will you probably never have to sell, but you also have found an excellent investment.  So as you contemplate that next move, be proactive and think about Ventas Inc. and what they are doing, and remember at the end of the day, none of us is getting any younger.

 

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The Future of Real Estate Marketing is Here

Posted on February 24, 2011 by Tim Freund

For some time now, I have been working every angle for my clients; looking for new and innovative ways with which to market their properties.  This week I have been in New Orleans with Dilbeck Real Estate, now a Real Living franchisee.  To be honest, I have felt pretty comfortable with the fact that most Realtors are well behind the times when it comes to marketing, relying on the MLS and the newspaper to sell their homes.  I have prided myself about running circles around them – hey what can I say, I’m a competitive guy – yet most home sellers have no idea about these differences in Realtors or real estate companies.  It’s a little like insurance: my parents used this company or that, so when it was time for me to get insurance, I went to the same as my parents.  However, at this conference I have become aware of some Realtors and companies that are pushing the boundaries of real estate marketing using video as infomercials, social networking, texting and blogging in ways, frankly, never occurred to me.  These companies are becoming a resource for not just all things real estate but community as well, and they are blurring the line of what a Realtor is.  Now there’s good news and bad news here.  The bad news is that the vast majority of Realtors being hired by sellers today are dinosaurs, relying on old school ways to find buyers and market properties.  Don’t get me wrong, selling is still selling but few Realtors are really applying these techniques and these new mediums right now, and that’s the good news.

I have realized, here in New Orleans, that there are enormous differences between companies and not just agents.  It’s been an eye opening experience and I’m excited to share these concepts with my clients.  If the world of home selling is still a bit of the Wild West, then there is a new sheriff in town and it’s Real Living.  Look to hear more from me about them in the coming months, as Dilbeck and Real Living integrate the very best marketing and technologies out there, to better serve our clients and our community.  The future of real estate marketing is here, and it’s Real Living.

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Half Empty, Half Full

Posted on February 16, 2011 by Tim Freund

As you probably have realized, when it comes to the real estate market, I’m a “Glass Half-Full” kind of guy.  But lately, even I have begun to question some of my core assumptions.  I have been predicting inflation, rising rates, an improving economy and a stabilizing real estate market for some months now.  Yet January and February have been so slow for real estate, that I’m beginning to think I may be wrong.

Yes, inflation in commodities and rising food and energy prices certainly suggest core inflation is percolating, yet the labor market shows no signs of inflation – there are just too many unemployed to create wage pressure.  Retail sales have been improving, a key to an improving economy since 70% of the economy hinges on consumer spending, however, even those latest numbers are disappointing.  Perhaps it’s the weather; perhaps it’s just a typical slow start to the new year.  But from my vantage point, things are starting to look a little like the 1st quarter of 2009, a time fear and uncertainty.  There is one big difference between now and then.  In Q1 2009 the stock market was in a free fall and panic was felt everywhere.  Fast forward to Q1 2011, and the stock market is not on its way towards 6500 but rather touching new highs; the employment numbers really are somewhat better and there isn’t that sense of sheer panic like there was 2 years ago.  So why then, am I filled with so much trepidation?  I suppose it stems from my general sense of uncertainty.  Uncertainty in the Middle East; uncertainty about the deficit, both in California and the Nation; uncertainty about rising interest rates (I’m certain they’ve risen, but uncertain what effect that will have on housing); and yes, my uncertainty of whether the glass is still half full, or just perhaps it’s become half empty.

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