Value versus Market Value

You’ve heard the age old saying that a product is worth what someone is willing to pay for it.  As a child I collected baseball cards and was intensely interested in the value of each one.  I’d tear through the pack accompanied by my Beckett’s guide eager to determine the value of each card.  As I grew older I remember asking my father about how Beckett’s could determine the value of so many different players from so many different eras.  He explained that the Beckett’s guide was a tool but that the value was based on scarcity and how many of each cards there were.  Supply and demand.

Real estate is similar in many ways… but also very different.  As I write this in the Spring of 2013 San Diego County’s real estate inventory has dried up.  Looking for a single family detached house in Oceanside, Vista, or San Marcos with at least 3 bedrooms, 2 baths, and built post-1990?  Right now, there are 6 for sale (per Sandicor 04/18/2013).  With such a shortage what inevitably is happening is that prices rise.  Supply shrivels up, demand stays the same (or increases), prices go up.  Basic economics.

The issue is the appraisal.  An appraisal is hired by the lender of the buyer to ensure that the collateral for the loan is worth what they’re lending.  In other words, if I’m going to loan you $200,000 of my money I want to make sure that whatever you’re buying with it is actually worth $200,000 so that if you need to sell it I know you’ll be able to pay me back.  That’s essentially what an appraisal is.

These days, the challenge is the balancing act the buyer must play to come in strong enough to get the property but realistic enough to have the property appraise.  If a property appraises lower than the agreed upon price, buyer and seller must come to an agreement as to if the seller will drop the price, the buyer will pay over the appraised value, or a combination of the two.  These days, with so many offers in on properties, the buyer doesn’t have a leg to stand on trying to negotiate the seller down to the appraised value.  Usually, if the property appraises more than $10,000 low the deal will fall apart.

Simple example, I recently listed and sold at property at 149 Christen Way in San Marcos.  When I met with the sellers we looked over comparable sales and determined that the value of the house was around $225,000.  In other words, we felt confident that the property would appraise at $225,000.  Still, with the lack of inventory we expected to receive offers above that price.  After 3 days on the market we were looking at 22 offers including 3 cash offers.  The property sold for $245,000.  That’s market value.  Obviously cash is king in this market because there is no appraisal.  The buyer is happy with the purchase at that price and the seller can be assured that there will not be any issues with regards to value.

If you don’t have a bunch of cash sitting around, you’re going to need an agent that can get your financed offer accepted.  It’s not always just an agent that promises that the deal will go through or sends a sob-story of why you deserve it more than the other 21 offers.  You need an agent that’s connected and understands what a seller is looking for.

Call, email, or text me with questions and I look forward to getting your offer accepted.

I Want a Rental. Who Should I Rent To?

The most important part of renting is figuring out your demographic and what are the advantages and disadvantages to them.  If you’re new to investing, you’re probably looking under $400,000.  Since you’re looking for a combination of monthly cash flow and long term appreciation, you’re probably trying to stay in the strongest long-term value areas.  For San Diego County that would be the coastal neighborhoods: Carlsbad, Encinitas, Solana Beach, Del Mar, Carmel Valley, etc.  The challenge is that in these places it’s unlikely you will find a detached single family home under $400,000.  Therefore, your demographic renter needs to be someone that feels comfortable in a twinhome, townhome, or condo.  Generally that means you renters are:

1.  Military

2.  Young Professionals

3.  Small/Growing Families

4.  Students

Each of these demographics have there own positives and negatives and it’s important to get to know them before signing the lease.

1.  Military: the biggest advantage in my opinion is that they tend to be very reliable.  The money that is being paid out for rent is specifically given to them from the government as their housing allowance.  Therefore, they will always have rent money.  Also, it’s easy to handle problems if things aren’t working.  A simple call to a CO (Commanding Officer) explaining the issue and seeking his/her help will usually solve the problem.  The downsides are that at a moment’s notice they may be deployed and legally they are allowed to exit the lease agreement without penalty (rightfully so since they work so hard for us).  The only other disadvantage is that you may have to deal with a younger demographic that may not be as responsible as others (I had a young military man tenant pee all over his own couch when he got drunk recently — not sure this is the ideal tenant).

2.  Young Professionals: the advantages is that they often don’t require much space and may even room with one or two friends.  I know other landlords have had difficulty with this demographic because the job market is still tough and even though many young professionals are highly educated, their resumes are still mostly blank and they’re the first to get laid off in cut backs.  Plus, usually once they enter into a serious relationship the prospect of living in a small space or with friends isn’t as desirable.  Furthermore, if renting to an unmarried couple who is living together (particularly for the first time), there can be real challenges in the relationship and if someone leaves it can often leave the remaining party unable to cover rent.

3.  Small/Growing Families: in my opinion, usually the best tenant to have.  Usually moderately established and in an age range that is generally focused on family well-being more than individual satisfaction.  This usually makes for a quality tenant and one that may be around long-term.  They are often focused on school districts and proximity to parks, etc.

4.  Students: the nice thing about students is that you know that they will always need a place and usually won’t have a problem with them not being able to pay (since most students either have loan money or their parent’s money since they aren’t working and going to school).  The disadvantage is that students generally aren’t interested in renting the summer months (they want to rent September to May) and you often have to deal with multiple people to collect rent.  When I was in college in the early 2000’s, my girlfriend at the time lived in a 2BR condo with 6 girls.  They were respectful and good tenants, but being the landlord and potentially collecting 6 different checks makes for a headache (and a lot of estrogen in your condo).  The only other issue you often find with student tenants is that they are living in their college years and drinking and parties are a part of the lifestyle.  Certainly you can screen out the frat boys but you need to expect that there will be some wear-and-tear more than other tenants.

Preparing Your House for Sale? Avoid the Pitfalls

When you’re selling a house there are things you can control… and things you can’t.  The important thing is to recognize what the strengths and weaknesses of your house are and to have a professional indicate to you how they affect the value of your house.  Some items are obvious: road noise decreases value, granite counter tops increase it.  Others are not so easy:  What about a pool?  What about a house on 10+ acres?

Marketing your house to the specific demographic of buyer is obviously extremely important but you don’t want to pigeon-hole yourself.  Just because you’re in a great school district doesn’t mean that you can ignore down-sizing buyers or single professionals.  Instead you want to emphasize the strengths but also broaden a buyers perspective to the advantages of your house as compared to all the competition.

I’ll explain it to you in a quick story of a recent client.  I just closed with a husband and wife on a property in Oceanside that love to swim.  Husband surfs daily.  Wife is an avid swimmer for exercise.  When we first met they told me some of their basic wants and needs and the most important thing was that the house “MUST have a pool”.  You know where this is going…

They just closed on a house at the top of their price range without a private pool or community one.

As I’ve mentioned before, residential real estate is bought and sold on emotion.  As a seller you need to recognize that when you prepare to sell it.  Therefore, recognize that a house that smells beautiful and has beds made and closets organized actually does help sell it.  Open windows and show off the view or natural light.  Arrange or stage rooms to show the size and functionality.  Place a potted plant or flowers in the kitchen, at the entry, or in a bathroom.  Don’t be present during a showing and don’t give people the walking tour (“And then in 1993 I put in new baseboards throughout the kitchen.  Aren’t they beautiful?”).  People want to buy a house not walk through someone else’s and the only way to do that is to help the buyer envision themselves there without you looking over there shoulder or telling them they can’t go in that room or open that closet.  Control the things that you can control and don’t worry about the rest.

And just be glad Calvin is not living next door to you.

Investment Comparison: How Does Real Estate Stack Up?

There’s no question that we are in funny economic times.  The stability of the housing market is potentially uncertain.  With the downgrade, the stock market is extremely volatile.  Even “safe” investments (like commodities and bonds) bring their own risks.  Here’s why to invest in real estate versus other places:

  1. Leveraging: the idea of leveraging is very important within real estate.  Let’s say you’ve got $100,000 to invest.  You can take that money into the stock market and invest in companies.  Today, the United Parcel Service (UPS) is trading at $66.26 per share.  You can take your $100,000 and buy about 1,500 share of UPS stock.  If UPS increases by 10% in one year you’ve made yourself $10,000.  Congratulations.  Within real estate, however, you can leverage that same money and increase your return on investment.  With a mortgage, $100,000 can be a 20% down payment on a $500,000 house.  If one year later the real estate market appreciates by 10% your $500,000 is now worth $550,000.  Same time period.  Same percentage increase.  Different result: congratulations times 5.
  2. Tangibility: similar case as the one above, only flipped.  Instead of a 10% increase, both the stock market and real estate markets take a hit of 50%.  Everything is worth half of yesterday.  Your $100,000 investment in UPS is worth $50,000 (on paper) and your $500,000 house is worth $250,000 (on paper).  The difference is that your house is something tangible you use everyday.  If UPS goes out of business and their stock goes to $0.00 you just had a really bad day and nothing to show for it.  If your house became “worthless” in the same time period, you would still be living there, still raising your family there, still able to rent it out or run a business out of it.  Neither is a great day and paying a mortgage on a house less than is owed is a crappy place to be, but nevertheless you’ve got a roof over your head and something physical to hold on to.
  3. Tax Shelter: I’ve talked about it much within many other blogs.  In the stock market (like other places) you can write off your loss.  Only in real estate is there the potential for tax write-offs when the property is going up in value. Property taxes and interest are just two of many places to save money within your taxes by owning.  Consult your CPA for additional information.

Record Low Interest Rates Yet Data Shows Lack of Activity. Why?

I recently read an article written by Time Magazine’s Alison Rogers discussing the recent trends within the national real estate market.  Her argument is that data has shown that while interest rates are at an all-time low (since Freddie Mac began keeping track of them in 1971) buyers still haven’t jumped in.  Her short article cites the restrictions of lenders as the main cause (albeit, not the only one).

Lending has definitely become more restrictive.  Gone are the days of people making $10/hour qualifying for $500,000 houses on “stated” income (you tell the lender how much you make, rather than any kind of documentation required).  I will also agree that the pendulum has swung to the uber-conservative where people with good income, good credit, and little debt still find getting a loan exhausting.  (Tangent story: recently had a client buy a house for his son and, as a lesson of responsibility for his son, got a loan and put his son on the title.  The father could’ve bought the house cash and nearly did when the lending got so tedious and involved.)  However, I cite many other reasons for the lack of activity in the market.  I see them as follows:

  1. Uncertainty in Where the  Market is Going:  yes, if you are a first time home buyer the tax advantages of buying a house far outweigh waiting out the market, even if it declines (see one of the Blog’s from last week: “Renting vs. Buying: The Whole Story”).  Still, it’s very hard to buy something today when it may decline in 6 months.  Psychologically, everyone wants to buy in an appreciating market where you can know for sure that the value is going up.  Those who are affected most by a declining market are investors.  Flipping a house has become very difficult unless you’ve got a lot of cash on hand and the ability to renovate at cost.  Even then, you gamble a little in a relatively shaky market.
  2. Uncertainty in the Job Market: in August of 2011 the unemployment rate was at 9.1% nationally.  Remember, that’s 9.1% of the total labor force that is unemployed but actively seeking employment and willing to work.  What that number doesn’t take into account are people who have jobs but see the guy in the next cubicle get canned.  Leah has a great job but sees Joe in the next office get laid off.  I can assure you the last thing crossing Leah’s mind is running out and buying a house.  People need jobs to buy houses and get loans and without the peace of mind of a stable job we aren’t going to see an increase in activity.
  3. Better ROI Elsewhere: return on investment (ROI) is the name of the game these days.  Got cash and need somewhere to put it?  Before the downgrade, the stock market might have been a better, albeit riskier, decision than the real estate market.  Take an above average example, Apple Inc.  At the beginning of 2009 it was selling for around $100 per share.  As of today (October 6, 2011) Apple Inc closed at $369.80 per.  Quadruple your investment since 2009?  Probably wouldn’t have happened in real estate unless you had cash.  The difference is that real estate has been a safer, longer term investment.  People that own houses and already have the tax shelter find that for bigger ROI the stock market is the way to go.

Overall, real estate is always a good investment if you’re in it for the long haul.  If you want to buy something and flip it in the next 6 months, I’d say you better have experience doing it and trust that you can get something well below market.  Buying today and holding for 5 years or more?  I can honestly say that within that time frame the market will be in a better place.  If you have questions or are interested in discusses the market, please always feel free to call or email me.

Residential Real Estate Appraisals: What Are They and What Do They Do?

If you purchase a house with a loan, the lender requires an appraiser to assess the property and make sure that the market value is there.  In other words, if you’re buying a house for $500,000 the bank wants to make sure the house isn’t worth only $200,000 and that they’re lending you $300,000 of extra money.  Sounds legitimate.

The problem arises when the discussion of market value comes into play.  Buyer writes an offer.  Seller counters.  Buyer agrees.  Buyer and Seller have to come to an agreement about what the house is worth.  To many people, that is the definition of value: “what someone is willing to pay”.  The trouble is that that isn’t necessarily market value.  If the same floor plan just sold 3 weeks ago as the property-in-question for $300,000, and today Buyer and Seller agree to purchase the same floor plan for $310,000 in a declining market, the market value may come in less than $300,000, depending on a variety of factors (interior upgrades, lot size, etc).  Market value isn’t an exact science and appraisers are licensed in using a bunch of determining factors to calculate value (i.e. a larger house that’s a little bit older than the property-in-question and has a pool sold 0.25 miles away 3 weeks ago.  How does that affect the market value of the property-in-question?).  Appraisers use a variety of tools in order to determine how each item affects the value as well as take into account trends within the local and national market.  The main thing to remember is that the appraiser works for the bank.  The appraiser’s job is to protect the bank’s interest and make sure there isn’t any loan fraud or other potentially illegal activity going on.

The lending pendulum has swung from the liberal times of the mid 2000’s (when people making $10/hour could afford $500,000 houses) to the very conservative.  Appraisals have come along with that.  Used to be that lenders and appraisers had relationships and Dave the Lender could call up Tony the Appraiser and have him appraise the property.  Of course, Tony appreciated the business from Dave and therefore was more inclined to make things work and have the property appraise at value.  Now, appraisals go into a hat and a random appraiser is selected.  Seems better but the problem sometimes is that you get an appraiser who potentially isn’t familiar with the specific neighborhood.

The second biggest problem with appraisals is that the appraiser is given the contract.  From the sense of putting deals together it makes sense but for determining market value it doesn’t make sense.  I’ll tell you a quick story regarding a recent house I sold at 3120 Skyline Drive in Oceanside.  The buyer wrote an offer at $800,000 and the seller countered at $825,000.  The buyer agreed.  We went into escrow at $825,000.  However, the appraiser received the contracts from the lender (remember, the appraiser works for the lender) but only got the offer at $800,000 without the counter.  He appraised the property at $800,000 (surprise, surprise).  He thought he was making the property appraise at value.  Actually we were undervalued.  My client (the seller) brought up a valid argument.  If the appraiser is only going off the contract, what’s the point?!  It’s a valid argument.  The appraiser’s job is to determine the market value of the property.  At the same time, he doesn’t want to be the one to screw up everyone’s deal (FYI — appraisers get about $250-$300 take home per appraisal.  Lender fees are about 1% of the purchase price.  Realtor fees are about 3% of the purchase price per side.  Etc, etc).  You can see the dilemma.

Appraisers have one of the toughest jobs within real estate.  Often there are qualified buyers who are agreeing with motivated sellers to buy a house at a specific price and the property falls through because it doesn’t appraise.  At the same time, difficult properties to appraise (i.e. property different than surrounding properties) draw increased scrutiny from the appraiser’s boss (aka The Underwriter).

If you run into trouble with appraisals, there are ways to combat them.  Give me a call or drop me an email if you run into trouble and need some help.

Auctions: What Are They and How Do I Get One?

There is constant discussion about auctions in real estate.  Basically, there are two main types to be aware of:

1.  Notice of Trustee’s Sale Auction: this is the type of auction when a short sale becomes a foreclosure.  After receiving a Notice of Default (after 3 months on non-payment) the owner has 6 months to cure the default.  If the default isn’t cured within time specified, the property goes to auction where it is sold on the courthouse steps.  If no one buys the house at a price the bank deems reasonable, the bank will take the house back and put it on the market as a foreclosure.  Notice of Trustee (NOT) auctions are common these days because of the high volume of short sales.  I’ve been to several in San Diego and the houses are auctioned literally on the courthouse steps with auctioneer going quickly through each house.  A representative for the bank is in attendance and it’s his/her job to ensure that the house is being bought above the bank’s bottom dollar.  The challenge with these types of sales is that they are usually cash only purchases and are done in “As Is” fashion.

2.  Auction-Style Regular Sale: this is a relatively rare type of auction for normal housing.  It’s a creative way to try and sell a house quickly and create a lot of buzz about the property within a short time period.  They usually don’t limit based on financing or length of escrow, but will take those factors into consideration before moving forward with the buyer.  Also, usually everyone is aware of what the highest bid is.  I’ve seen them done via phone and they ask you if you want to proceed to the next level of bidding.  If not, they thank you for your time and you are disconnected from the call.

In my opinion, it’s a gimmick that doesn’t do the best thing for the seller.  Perhaps you’ve seen the recent raffle for houses.  People can buy a $50 ticket and the house is given to the lucky winner.  The hope is that if the house is worth $500,000 the agent sells more than 10,000 tickets and makes the seller a decent profit.  On the other side, the buyer’s hope is to get into a house for a significant discount (say, $250 for 5 tickets).  The problem is that it’s a game of chance.  The agent hopes that they sell enough tickets to justify the sale.  The buyer hopes they are lucky enough to beat the 1 in 3,000 odds.

To me, auctions are a great opportunity for a buyer but another gimmick that hurts the seller.  Here’s why:

– usually there is a weekend where the buyers must attend a viewing of the house before being eligible for the auction.  This is usually a specific time on a weekend (Saturday and Sunday).  The problem is that that doesn’t always make sense for every buyer.  A four hour time slot (let’s say 2 hours each day) is typical and to make that window limits getting all qualified buyers in the door to be eligible to bid.  This limits the potential auctioneers.  It also means that people who think their bid won’t be enough may or may not go.  My advice: if you’re within $100,000 of what the house is worth, go.  You’ve got nothing to lose.  Another bit of advice: take your Realtor.  Get good advice about the value of the house and let him/her read through the obligations of the auction contract (i.e. is it being purchased “As Is”?  Is there an escape clause for the seller if they don’t get enough?  Will there still be a contingency period to get inspections done? etc).

-opening bids are usually about 50% of value in order to get everyone interested.  That means a $600,000 house might have an opening bid of $300,000.  That’s nice at the beginning but for most buyers not doing their homework on the auction and the true value of the house, they are set up with unrealistic expectations.  The thought is that someone who can afford more but only wants to pay $550,000 gets caught up in the “game” of the auction and outbids someone else for $585,000 and the house gets sold in a weekend.  My advice to buyers is to pick a number before seeing the house and stick to it.  Many times in traditional negotiations I’ll recommend to the buyer that we go take another look in between Counter Offer #1 and #2.  I do this because I want them to make sure they like the place and are excited about moving forward.  Looking at houses is fun; buying a house is a whole different animal.  With an auction you won’t have the luxury of going back to view the house again after the last bid.  It’s easy to say “just one more bid” over and over again until you end up $35,000 above where you wanted.  Consult a Realtor, find a number, stick with it.

Buying or Selling Out of State? I Can Help!

Many people are aware that I can help them buy and sell residential real estate within San Diego County, Riverside County, and Orange County (actually I am California licensed so I could help sell someone’s house personally anywhere in the state).  What people sometime don’t know is that because I’m part of a network of Realtors within my company and because of relationships that I have with some very large lending institutions, I can put people in contact with a local Realtor who has a proven track record of success anywhere in the world.

For instance, let’s say your grandmother wants to move from Chicago to the beaches of Florida.  I can help.  I can put her in contact with a quality agent in both areas (selling and buying agent) that is a veteran, quality agent.  Maybe she already has a relationship with someone she trusts (and I always recommend using those first) but if she doesn’t, it’s a way she can at least start with someone who is qualified.  Plus, as an added benefit, then I can keep tabs on that agent and keep him/her accountable and make sure that he/she is working hard in order to get that home sold or help her buy a beautiful place to live.  When I recommend someone I realize that the quality of work (or lack thereof) is a reflection of me, and so I take all of that business very seriously.

If you or someone you know needs to buy or sell outside of Southern California, please feel free to contact me and I can help.  It’s just another way that I look to provide service that truly is “a foot above the rest…”