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.

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.

Renting vs Buying: The Whole Story

The age old question: is it worth it to buy or should I continue renting?  Well, let’s look at a hypothetical:

Let’s say John currently rents a 2 bedroom place in San Diego for $1,500 per month.  He’s tired of paying someone else’s mortgage and wants to begin putting money into his own equity and is trying to figure out if it’s worth it.  First off, let’s look at the financial side of things.  In order to do that we need to begin with a couple of rules of thumb:

1.  First off, calculating a payment can be complex and I always recommend speaking with a lender, but an easy way to start is to think that for every percentage point of interest rate you have, your monthly payment is equal to $100 times that for every $100,000 you finance.  In other words, let’s say you’re financing $300,000 at 5%.  A basic payment (before HOA dues and property taxes) would be $1,500 per month (5% at $100,000 would be $500.  $500 times 3 is $1,500).  Note that this doesn’t include property taxes, which in San Diego County are about 1.25% of the purchase price or any HOA.  Also, without getting too technical, the monthly payment depends on the type of loan.  If you do a VA loan or an FHA loan your property taxes are built into your monthly payment in an impounds account (i.e. assuming a $300,000 purchase price with a VA loan, property taxes would be $3,750 annually at 1.25%, or an additional $312.50 per month built into the payment within an impounds account).

2.  John’s payment is heavily reliant on his down payment and financing because the qualifications are different.  If he puts 20% down and does a conventional loan a lender only needs to see his last year’s tax statement.  An FHA loan (with 3.5% down) would be the last two years and these days banks want to see an increase in income from oldest to most recent.  Again, everything we’re doing here is “rule-of-thumb” without a calculator and just to give you a basic understanding.  In order to know what you qualify for and what a payment would be, speak with a lender.

Ok, back to John.  John’s trying to figure out if it’s worth it to buy today or one year from today since the market is so wacky.  John’s biggest concern is that if he buys something today and then prices soften more, maybe he should’ve waited.  Maybe.  Think of this: if John is paying $1,500 per month, in order to save money for next year the market needs to drop by $18,000 ($1,500 rent per month times 12 months).  That may not mean much at the $400,000 and $500,000 level but if John likes his payment around $1,500 per month, he’s probably looking in the $250,000 – $300,000 house area.  An $18,000 drop would be a drop of 7.2% drop (at $250,000).

Another major benefit to home ownership is the tax break.  Owning a house and paying a mortgage gives you the opportunity to  write off all your mortgage interest and property taxes.  Consult a CPA to know exactly what you can write off.  With the money saved in taxes, a $1,700 payment really becomes at least a $1,500 payment.

Making the jump to buy a home is a big step.  It means you are making a commitment to pay on a house for (usually) the next 30 years.  It means that you are established enough to feel like this will be home for at least the next couple of years, or that you can rent it out.  It means you are willing to take on the challenges of home ownership (i.e. plumbing breaks, roof leaks, etc) without the help of a management company or a landlord to call.  But here’s the kicker, after all the tax benefits and assuming he can find something he likes in his price range, John can actually save money by buying right now as compared with waiting until next year.

There’s no question our market is in uncertain times.  But if John knows that he will be staying in the house for at least the next 5 years, market signs are very strong that purchasing right now is a smart decision.  Based on the numbers above, if John is looking in the $250,000 house range, the market would need to drop 10% in the next year for him to break even.  Any drop less than that means he’s actually making (or saving) money.

If you have questions about it, please feel free to contact me.

Are There Any Penalties for Backing Out of Escrow As a Buyer?

I was asked this today by a first time buyer and thought it would be a good question to blog about.  In California real estate, the buyer is protected by the contract.  First off, with most transactions the buyer will write what’s called an Earnest Money Deposit (also called an Initial Deposit or EMD).  This is generally 1-3% of the sales price and is put into escrow.  The money is taken out of the account and held.  Think of it like a security deposit when you rent a place.  The buyer puts some skin in the game and then has the option of getting it back.  How you ask?  Everything is negotiable but in a standard contract the buyer has 17 days after acceptance to get all inspections done, review disclosures from the seller, get the loan in order, and order and approval an appraisal.

Side notes (it’s easy to go off on many tangents but I will try and keep it simple):

1.   Notice that I say “the buyer has 17 days after acceptance…”.  Let’s say the buyer writes an offer on Monday and the seller counters the offer (Counter Offer #1) on Tuesday.  Then, after thinking about it for a day the buyer accepts the sellers Counter Offer #1 on Thursday.  All the time periods for the transaction will be based off the buyer’s acceptance date of Counter Offer #1 (Thursday).

2.  The seller can never cancel the deal… unless the buyer says they’re going to do something and then doesn’t do it.  For example, a standard contract says that the buyer has 17 days after acceptance to remove contingencies (meaning, the buyer has done all inspections, read all the disclosures from the seller, had the property appraised by the lender, etc and is willing to move forward and make their Earnest Money Deposit non-refundable).  If day 18 after acceptance comes around and the buyer hasn’t removed contingencies (as they said that they would do in the original contract), then the seller has the opportunity to take action.  The seller can give the buyer a “Notice to Perform” which gives the buyer 48-72 hours (depending on the contract and what’s been agreed to) to “perform” (in this case, remove contingencies).  If the buyer doesn’t perform in the time specified by the seller, then the seller has the ability to cancel the agreement.  Under section 14C of the Residential Purchase Agreement discussing the Seller’s Right to Cancel it states:

“If, within the time specified in this Agreement, Buyer does not, in writing, deliver to Seller a removal applicable contingency or cancellation of this agreement (in other words, if after the 17 day period or whatever was agreed upon in the original contract, the buyer hasn’t given the seller a removal of contingencies or a cancellation) then Seller, after first delivering to Buyer a Notice to Perform, may cancel this agreement.  In such an event, Seller shall authorize the return of Buyer’s deposit.”

3.  Long story, short: if the buyer backs out of the transaction within 17 days (or whatever is agreed upon) and never removes contingencies, in writing, then the contract says that the buyer is entitled to their full deposit.  In California you don’t a reason to back out of a transaction as a buyer.  Cold feet, changed your mind, spite, etc.  These are all acceptable answers.  (Not so in the famous Seinfeld episode of the “spite” coat.  Take a study break and watch the 1 minute video by clicking the link below)

\”You Said Spite\”

As is traditional with my blog posts, I’m getting long-winded.  The answer to the question, “Are there any penalties for backing out escrow as a buyer?” is that it depends on when you back out.  The only money you don’t get back is the money you pay for the physical inspection (since it’s a third party company coming to do it) and the appraisal.  Both are about $400-$500 each.  If you back out within the contingency time period (usually 17 days, as discussed) then you are entitled to your full EMD back.  If you remove contingencies in writing, you are making that money non-refundable and it goes to the seller for costs they’ve already incurred (moving vans, repairs, etc) as well as their time off the market.

Buyer’s Closing Costs: What Are They and How Much?

Any time you buy or sell a house there are fees.  As a buyer,  a general rule-of-thumb is that closing costs are about 3% of the purchase price.  In other words, if you buy a $400,000 house the closing costs will be about $12,000 for the buyer.  This number is separate from your down payment and is an estimate.  There is no way to know exactly as to how much a buyer’s closing costs will be because everything is negotiable (i.e. what’s your lender’s fee? are you buying down your rate at an additional cost? when are you closing escrow within the month since all property taxes, HOA dues, etc are prorated? etc etc).  In California, the seller pays the buyer’s agent’s commissions so none of these closing costs are going to the agent.  An important thing to note, however, is that many agents use a Transaction Coordinator (a person within the agent’s office who keeps the file in order and makes sure all disclosures, reports, etc are signed correctly).  Many buyer’s agents will charge their client for this service.  I personally don’t feel it’s justified (since it’s not the buyer’s problem that the file needs to be in order) and I recommend that every buyer ask their agent to waive this fee.  I’ve seen them go for anywhere from $500 -$2,000.  It’s an important thing for the file to be in order, but it’s a business expense your agent should pick up.  Look for it hidden in an “Additional Fee Disclosure” or “Transaction Coordinator Fee Disclosure”.  Ask your agent, lender, and escrow for an estimate of costs and push hard for your agent to remove that fee.  If you have questions about closing costs or want a estimated breakdown, please contact me.

What is a Short Sale?

In certain qualified cases, where a homeowner owes more on their home than what it is worth today, a lender may allow the homeowner to sell the property for less than the mortgage balance and accept a short sale.  A short sale allows the homeowner to sell their home to a buyer thereby avoiding a lengthy foreclosure process that can be damaging to credit and future ability to purchase real estate.  To qualify for a short sale as a homeowner you must meet three simple requirements: 1) you must have a financial hardship or a verifiable reason why you’re unable to pay your mortgage payment 2) you must insolvency, or in the eyes of the bank you must not have the cash or assets to pay off your mortgage balance and 3) you must have a monthly shortfall or verifiable financials that show that each month you can’t afford all of your monthly payment obligations including your mortgage.  If you meet these three requirements it is very possible that with the right Realtor you will be able to negotiate a short sale.

I often get questions about the timelines of short sales.  From start to finish how long does the process take?  That’s unfortunately hard to say.  It depends on many different factors.  Let’s take a hypothetical example to help illustrate this:

Let’s say John buys a house in 2005 for $500,000.  When he buys it in 2005, he does an interest only loan with a 1st trust deed (loan) with Wells Fargo for $400,000 and a 2nd trust deed with Chase for $100,000.  He does this because by staying under the $417,000 loan limits at the time he buys he allows himself to get the best interest rate at the time.

Then, the market tanks.

Today, John’s house is worth $200,000 and he just lost his job with the recession.  John needs to short sale his house.  In a normal transaction, if John were to sell his house at $200,000 today he would owe $200,000 to Wells Fargo (1st Trust Deed) and $100,000 to Chase (2nd Trust Deed).  NOTE: Obviously, John has been making payments since 2005 in this example so those numbers will be slightly less depending on the type of loans he got in 2005, how much he pays monthly and if he pays over his mortgage payment towards prinipal, etc etc, but for ease of numbers let’s leave those numbers as they are.  In a short sale, John needs to prove a hardship and prove that something bad happened (i.e. his job loss) which makes it impossible to continue making the payment.  A market change isn’t an acceptable answer.  Now, he calls up his favorite Realtor (read: steveploetzhomes.com) and begins the process of short selling his house.

A few important things to know:

1) The short sale process doesn’t begin until there is a qualified, ready-willing-and-able buyer who has submitted an offer.  Only then will the bank begin the process.  From there, they will start by going getting a “short sale package” from the listing agent complete with John’s financials, job history, etc in order to prove that there is a hardship and that he isn’t able to afford the payment.

2) Because the process doesn’t start until there is an offer, many listing agents will under price the house in order to get it going.  For example, John’s Realtor may list the house for $170,000 in order to get offers submitted.  Once these offers are submitted the property is held in “Contingent” status.  Short sales from start to finish can take anywhere from 3-12 months and therefore most Realtors don’t count on the original buyer to stick around.  (Usually after several months, that buyer finds another house and buys it)  But, the Realtor doesn’t let the bank know the buyer is gone.  The bank looks at the offer and counters the buyer (3-12 months later) with an offer of $205,000.  Now, the buyer is gone but the listing agent puts the house back on the market (from “Contingent” back to “Active”) and increases the price to $205,000 in the MLS with “APPROVED Short Sale” in the remarks.

3) Short sales are similar to bank owned foreclosures (or REOs) in that usually the bank will not pay for repairs (including any and all termite damage repairs) and sell it “As Is”.  The advantage is that you can get property at a discount (sometimes), the disadvantage is that you can go in blind sometimes.

Short sales are complex and there are many moving parts.  I recommend you contact me with any questions and I can help you through the buying and selling side.

Philip Shiffman

“As you are well aware my wife and I just closed on a condominium in San Diego and Steve represented us.

This is to let you know that Steve did a wonderful job in representing us. Specifically, he handled the offer/counter offer phase to our satisfaction, he guided us through the labyrinth of California forms and answered our questions and concerns in a timely fashion.

If all of your sales reps perform as Steve, your firm should do very well.

Yours truly,
Philip J. Shiffman”