Sunday, November 22, 2020

List It Or Sell It Yourself?

Many investors and some home owners with a do-it-yourself bent believe they can save a couple thousand dollars by selling their house or condo themselves. Some are quite happy with the outcome and others eventually turn to an agent to sell their property. So what does each choice re quire and yield?

For Sale By Owner

As you drive around, you are likely to see those red and white For Sale By Owner signs scattered among the standard signs featuring the face of a smiling realtor. They can be picked up at any blue or orange store. There are even companies that specialize in facilitating the process by supplying signs, flyers and other support materials.

Now that you have your sign and hopefully will start getting calls. Many of these calls are from neophyte realtors looking for listings as they begin their careers. In looking to save realtor commission, you can price the house to benefit from the saving or you can price it a little lower to make the sale easier. Then you can show the place and point the reasons it would be a wise purchase.

Of course, you will get the usual range of looky-loos and investors looking for bargains. If your negotiating technique is primarily lowering your price to accommodate objections, perhaps this is not a good choice for you. You can get some help in this area by getting a book like Never Split the Difference by former FBI hostage negotiator, Chris Voss.

When you find a buyer you can download the legal forms or get them at most office supply stores. Be sure you fill them out properly or they could be worth less than the paper they are printed on. Then take them to an attorney or title company to set up the closing. If you get a deposit (and you should) it is not yours yet. The people doing the closing are usually escrow agents that can hold it until the sale is completed.

I find it unusual to make this recommendation, but if this is your first effort at selling a piece of real estate, I would recommend a good real estate attorney. They will keep you from a multitude of costly missteps along the way That is a real estate attorney, not one who dabbles in real estate while spending most of their time handling wills and divorces.

What Can An Agent Do For You?

In many ways it depends on the agent. As with any profession, there are good ones, there are learners, and there are shysters. If you go this route, don't just pick an name from an advertisement, ask around and talk to the people who have worked with them.

The good ones will know the market and be able to set the price to be competitive so it attracts buyers. They will tell you how to arrange you house to be attractive to buyers. They will list it on the MLS and promote it to other agents. They will handle the paperwork in a legal and professional manner, and follow through with arranging inspections and all the other details that provide for a smooth closing.

For that, you pay them multiple thousands of dollars... and they will probably pay for themselves by getting you more for your property than you would get yourself. But, can you get it cheaper with a discount agent? Remember what I said about good and not-so-good agents. Like most things in life, you get what you pay for.

A good real estate agent can make a lot of money, but don't think they are making it just on you. There are a lot of expenses in doing a good job for their client including a share that goes to the brokerage that provides facilities and services to the agent. There are memberships in national, state and local realtors organizations. They pay for those beautiful signs, the digital lock boxes, advertising, driving people around showing houses. You may only see the buyer they bring you at closing, but you may not know about the one or two dozen prospects they brought through along the way.

Most are hard working people, concentrating on selling your property – they don't get paid unless you do.

How About Investors?

If you've been around a while, you know the paperwork. You know, or should know, the title companies and attorneys, depending on your area, that can do a clean closing and take care of your interests. The question becomes, is handling the sale the best use of your time? Would you be better off looking at and preparing other properties? Only you can answer that question.

If you are looking to sell the place with owner financing, you are working with an entirely different economic reality. Realtors tend to stay away from these things, partly because of comfort level, and partly because there may not be enough there to pay their commission – in which case you have no initial income for your trouble.

These are deals that are generally best handled yourself as they tend to be easy sales since there are many people unable to qualify for a mortgage. Just make sure you do a thorough background check. On these deals, a good title company is worth it's weight in gold. Along with this you would need a cooperative residential mortgage loan originator (RMLO) to put together the paperwork to be sure you don't give someone a free house – it's worth the money. Even though they are gone from congress, Messrs Dodd and Frank are still looking over your shoulder “protecting” the consumer. Mortgage brokers can point you in the right direction if you don't know of any.

There is a lot of money involved in either choice, so you may want to give it a lot of thought.

Sunday, November 8, 2020

To Buy Or To Build... That Is The Question

Everybody needs a place to live. Some are happy renting and other people want a home that they own. If your preference leans toward ownership, and you have the financial resources, you have the choice of purchasing an existing property or having one built to your specifications.

Price Is Just The Beginning

Dave Ramsey tells us that last year the average cost of new construction was around $485,000 while the average price of an existing house was in the neighborhood of $309,000. Prices may be higher or lower in your area but there is still a sizeable gap between new and existing housing. New semi-custom tract houses save some money over full custom builds, but they are still around $50,000 higher than an existing residence.

What Do Your Dollars Buy You?

The big draw for many who chose to build is the ability to have a home just the way they want it with the newest materials and the fashionable colors with the perfect room layout. These things are important and they are what makes the place yours. However there is also some real value in things you don't see as well. Beneath the shiny new surfaces you will find some of the latest in home comfort systems. They are usually longer lasting with higher efficiency ratings. Beyond that, they are new with warranties and their full functioning life spans ahead of them.

While you usually won't be able to bargain about the price, there is often the possibility of asking for concessions from the builder like material upgrades or an extra feature or two.

Sounds Great! What's The Downside?

Other than the extra truck load of cash, what else do you have to think about? The most obvious is the time element. Building a new house takes months, not weeks. There are materials delays and weather delays. One summer when I was in college I worked on a masonry crew. I must say I was never in better physical shape in my life. However when we ran into a rainy spell, we only worked half the time. Brick layers sitting in their trucks watching the raindrops fall don't get the job done quickly. If you are in the northern part of the country and you don't get the job done before winter sets in, you could have several months delay. My dad worked for a masonry contractor and spent his winters doing odd jobs as a handy man since the regular outdoor work came to a halt.

If there are delays or interruptions in the materials supply, the builders costs, and your price, escalate, as we have seen with lumber prices through the Chinese flu fiasco. Sometimes this, or other financial reverses stretch the builder's finances beyond their capacity to survive. It is not unusual for some builders to have operated under several corporate entities as circumstances got out of hand for them. This is not to say don't build, but to strongly suggest you look at the financial stability of the builder.

If you are one of the first building in a new development be aware you may have to deal with the mud and the noise of construction equipment all around you. Here again, the buider's stability is important but so are the vagaries of economic fluctuations. During the 2008 debacle I was in the Richmond VA area and there were several new communities with roads laid out and a few homes, besides the sample ready for their home owners. When the financing dried up, construction stopped and the a those who moved in their almost million dollar homes were living in a ghost town with a few house started and abandoned. Where there is an opportunity, someone would come around and pick up the pieces eventually.

Then there is the punchlist. The very existence indicates that there will be bugs in the new home. Reputable builders handle this list of fixes in a timely manner. Here is where talking with their previous buyers is important to your peace of mind and happiness with your purchase.

What About An Existing House

With an existing house you can pretty much see what you are getting and you don't have to wait months to move in, unless there are issue with the seller. You will see the property and the price. If you don't like the price you can feel free make another offer. The seller doesn't have to accept, but often there is room for bargaining unless you are in a strong sellers market.

Whether you knock them down a few thousand dollars or not, you are still paying much less than a new property so there is some space to make the place to your liking. You can, and most assuredly should, have a thorough inspection to be sure you are not walking in to a money pit. If the appliances and HVAC systems work but appear to be on their last legs you can ask the seller to purchase a warranty so you don't get any expensive surprises in the first year or two.

Of course inspectors sometimes miss flaws, but they are few and far between as most have a fetish about pointing out everything that could possibly go wrong and then some. If you are happy with the place as it is presented, it could be a worthwhile purchase..

You will have saved plenty of money to update some of the technology and correct some of the updates from the previous owner to make the place yours.

Pay Your Money and Make Your Choice

Either new or previous construction can meet your needs nicely. Pay attention as you are shopping and either choice can be the right one. Just be aware of the pluses and minuses of each selection and factor them into your expectations and you won't be disappointed.

Sunday, November 1, 2020

Is Wholesaling For You?

Many potential real estate investors aren't sure how to get started. They don't have the money to go out and buy houses and they don't have the knowledge and contacts to pull the deals together yet. Because of this, they start out as bird dogs or wholesalers.

Bird Dogging, Not As Easy As It Looks

The idea of bringing a rehabber or landlord a deal and picking up a couple thousand dollars for your trouble sounds pretty appealing. Picking up deals should be simple, just look for people who need to sell, right? Think about it – if the deals are that easy to find, it would appear that the pros would have already picked them up. They would be paying you for a service.

It takes some searching, some digging, some talking to potential sellers, learning their stories and gaining their confidence. Then negotiating an agreement that someone would be willing to pay you for. After that, there is building relationships with your market – rehabbers who can actually close on the place and will not cut you out of the deal. Credibility and trust are key elements on both sides of the deal along with understanding what price will get you the deal.

Wholesaling Is An Art In Itself

Wholesaling gives you some more security in that you actually have the property under an assignable contract that you sell to the investor. The subject of assignable contracts will be held for another day. The investors know what the deal is and can take it to closing if it meets their requirements. In this case you have to have a valid agreement and a deposit. It will cost you a little cash, but many owners of distressed properties will accept a hundred dollars.

Some may not take you seriously with that small a deposit. However, if that is a problem, perhaps it's not the deal for you – or you may need to polish your negotiating skills. As Ron LeGrand is fond of saying, “you can't lose a big check if you don't write a big check.”

What Makes A Deal?

Whether you are bird dogging or wholesaling, the elements of a good deal remain the same. Just becauses a property is advertised as a fixer or appears to be selling somewhat below market doesn't mean a rehabber will jump at the opportunity you are offering.

First of all, if a place is listed, even as a fixer, rehabbers are usally already aware of it. Second, those actively promoting a fixer upper, whether owner or agent, are usally thinking in terms of owner-occupants who will fix the place for themselves. For example, a house with an after repaired value (ARV) of $100,000 that needs about $20,000 in repairs will often be offered at between $70,000 and $75,000. This is not a bad deal for someone who wants to make the home their own... but for a rehabber, the numbers just don't work.

I get emails all the time offering properties with projected ARVs and estimated repair costs that show the place to be a wonderful opportunity. The reality is that some are and some are not. Here is where you can gain the confidence of your potential buyers by doing your homework and increasing the accuracy of your figures.

Starting with the ARV

We all tend to be optimistic about the deals we propose, but to get this right, you have to throw away your rose colored glasses. You will not get a good number from Zillow.

Take a tip from realtors and find 3 or 4 recent sales (not listings) of similar properties – in the same area. That means do not use properties on the other side of major boundaries, like municipalities or major highways. They may look similar but there are other factors that may not be obvious.

Look for homes with the same level of finish you are looking to accomplish. Here is where Zillow can be helpful as the pictures can tell you something about each property. You are not looking at the absolute price, but at the price per square foot. That is how you can compare 1400 sq ft homes with 1550 sq ft homes and make some sense of it. Then drop the ARV a few thousand as rehabbers may be looking for a quicker sale and not go for top dollar.

Add In Expenses

Next you have to estimate repairs. This will come easier with time and I've almost always found these estimates kind of a suggestion that didn't always come close to reality. Experienced rehabbers will do their own estimates, but the closer you are to reality, the more your numbers will be trusted in the future. Develop relationships with a couple of contractors and get a some real world estimates until you can come close yourself.

Now you know that the place could be worth and you know what it will take to fix it, you are set to start contacting investors through ads, the local REIA, or whatever method you use. Right? Wrong!

There are a few items to factor in to your proposal. First you will have to include the acquisition cost as well as the selling costs – if using an agent or not. Then there is the not insignificant carrying cost of the money borrowed for the project.

Then you can't forget the 10-15% for profit for your buyer. If this is not there, there is no reason for anyone to do the deal.

Once you have all these numbers, you can figure out what you can offer for the property – oh yes, there is one more thing: your profit! It may take a few times to get it right, but each time you will gain experience that will help you do better next time. As John Maxwell says, “sometimes you win, sometimes you learn”.

Beating The Pros

When you find a property that looks like a good deal, others may have found it as well so you have to act fast. In the heat of the moment you may want the deal so badly you push the numbers a little just to get the agreement. You will find it is not difficult to outbid the professional competition. The danger here is that you offer enough to get the deal, but you have just priced yourself into a position where there is not enough meat on the bone for your buyer – the place doesn't close and your credibility is damaged.

The second caveat is to sell directly to the rehabbers or landlords. You may find other wholesalers hungry for deals that will pick yours up only to try to assign them to other investors. Here again, this can lift the price to a point where the real buyers can't make money and the deal won't close.

In either case, instead of beating the pros, you will have beaten yourself.

Wholesaling Into The Future

Some people make a nice living wholesaling one property after another. However, if they don't figure out how to keep a house now and then, it just like a job where you have to keep working all the time coming up with deals rather than developing the ongoing residual income that means you don't have to keep turning the crank to keep the dollars flowing.


 

Sunday, October 25, 2020

Shifting Real Estate Markets

It's interesting to read projections of various experts as they look toward the future of the real estate market. They seem to be seeing different factors or looking through different lenses, but that is to be expected. There are general trends, but in a county as large and geographically diverse as the US there are multiple markets and they don't always rise and fall in unison.

Escaping the Big City

In the past, we've discussed the exodus from the densely populated urban areas as many workers are now working from home and more than a few support business have shut down, either because there was no one to sell to or by dictatorial decree. The obvious result of this is the rapidly dropping cost of urban living. But there is more to this story – much more.

There is a trend among the affluent refugees to purchase vacation homes and live on vacation as the are no longer bound by commuting distances to downtown offices. Three cities in particular are experiencing this phenomenon: New York San Francisco and Miami. But to a lesser degree many other urban centers are seeing the same thing.

One such vacation spot is North Carolina's Outer Banks. It's a long stretch of barrier islands with nice beaches and elevated beach homes. Oh yes, and Kitty Hawk where the Wright Brothers made their first flight. According to the Outer Banks Association of Realtors sales this past September were up 120% over the same time last year. Even with the lock down stay-at-home orders and fear based mentality, residential sales on the islands are up over 30% for the year.

Beach Towns Aren't the Only Ones Booming

The National Association of Realtors tells us home sales overall were up 9.4% in September and median prices were up 15% year over year. People weary of urban living, the pandemic and various restrictions who have the dollars are taking advantage of the almost free financing and bugging out for more human friendly environs.

Of course this kind of increased demand pushes up the prices but it is in the process of depleting the available supply. The National Association of Realtors says there was only a 2.7 months supply of homes on the market. This is the lowest inventory level that they hae seen since they began this measurement in 1983, Elementary economics tells us that greater demand puts more upward pressure on pricing.

In middle America, Kansas has not been left behind. They are not on the extreme end of the scale, but they have just been chugging along despite the best efforts of the Chinese flu. They expect to see a 1% increase in home sales and 12% increase in new home permits with a 4.7 % increase in home prices this year and another 5.8% increase next year. There are always winners, even in uncertain times.

Of course, not every state can claim these numbers. Some have not been permitted to re-enter the American prosperity. Hopefully that will change soon.

How Long Will This Last

The folks at The Capitalist see the trend carrying into the new year as they see major cities hemorrhaging population. The folks at Fast Company are not so optimistic as they foresee a “dark winter”. Many economists have many opinions. What we see here is more evidence of the idea that if you would lay all the economists in the world end to end, they still would not reach a conclusion.

Not Everyone Is Participating

The retail and hospitality industries have taken a particular beating as people have holed up in their homes. Resort towns were turned into ghost towns. The Outer Banks, mentioned earlier, did not suffer the fate of more entertainment based destinations as the draw is more like relaxing at the beach.

There are people all over the country that aren't working that would love to return to their jobs. There are some jobs that are gone forever as many businesses could not survive the lockdown orders. Some who have never entered this part of the real world see all business owners as rolling in cash taking advantage of the poor defenseless consumer. Sure, some make a good living but they depend on the steady cash flow of customers coming through their doors. When that stops, many businesses close and people lose jobs.

On top of this, there are always those with economic difficulties that have their struggles, but this episode with the Chinese has multiplied their numbers dramatically. Then there are those who are working that just can't get approved for the low interest loans that are available to those with gold plated credit.

There will be cries for more low income housing as the eviction moratoria come to a close, Is this the best answer? I have to turn to the great American philosopher Groucho Marx when he told us, “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” We have seen more evidence of his wisdom in recent months to ever doubt his words.

Can Investors Help?

Some investors I know love Section 8 housing for the guaranteed payments they provide. Others won't touch them. I tend to fall into the latter cagegory, but that is a matter of personal philosophy, but it may be an answer for some.

Once people are back at work and generating some income, it may still be difficult for some to come up with the downpayment or even a security deposit. One approach some have taken is using a surety bond in place of a security deposit, if the income was there. It may even cover your risk better than just one months rent.

What about providing homes with owner financing? Almost by definition, many people in the position just described will have little to put into a downpayment. Perhaps they have something to trade, like a car or boat they don't really need, Some sort of bond may protect your investment in these cases too, although it won't provide the immediate income of the non-refundable deposit. Some thought and a little creativity may take us to the solution people are looking for. Never underestimate the ability of the American entrepreneur to find solutions to problems.