Friday, December 27, 2013

Home Buyers: Pull the Trigger or Toss in the Towel?

My son wants to talk about buying a house. Would I advise him any differently than I would a stranger? No, not really. Below is a list of what to consider.

1. If you're on the fence right this second, get off. Interest rates will go up in 2014, and so, probably, will prices.

2. If you'll be looking in 2014: Rates will likely go up. Interest on the ten-year Treasury, the biggest mortgage rate influencer, hit 3%, which it hasn't seen since 2011. I won't get into the boring stuff about Fed bond purchases and all that, but if rates hit 6%, I believe the market will stall.

3. All things being equal, prices should move up. That's good, because more sellers will poke their heads above water and be incentivized to sell. That means more inventory. Prices may edge up, but they won't be volatile and nerve-racking.

4. Buyers can afford a unique (to them) monthly payment. The amount is based on the mortgage amount (principal) and the interest rate. Since the payment has to stay constant, the interest rate and price can't both go up. That's arithmetic.

5. That being the case, buyers should not feel pressured. They'll be able to make sensible, unstressed decisions and should not give in to their real estate brokers, significant others, or HGTV.

6. Caveat to #5: Hot neighborhoods excepted.

7. Sales of existing homes have been off for the last three months. The so-called housing market recovery may not be a strong as advertised. Pay attention to these numbers when formulating your negotiating strategy. My view is that the housing market recovery is over-hyped, as real estate markets always tend to be.

8. If the market does stall out a little and you're looking at new construction, don't be shy about asking for builder concessions in the form of upgrades, added features (swindow coverings, loft shelving, e.g.), rebates for closing costs, etc. They're unlikely to lower the price because of their financing arrangements, but they absolutely hate carrying inventory.

9. A takeway: You get 50% of what you ask for. You get 0%of what you don't ask for.

10. It may seem arcane and insiderish, but watch and see if the private secondary mortgage market makes a comeback. Right now, the U.S. government is the biggest player (ok, Fannie and Freddie are technically private, but they're in receivership and being propped up buy Treasury). The return of private mortgage investors signals confidence in both the real estate market and the economy. Rates would stabilize, more credit would be available and everyone would feel happier about things.

11. The final takeaway: Do your homework before looking for houses and getting all starry-eyed. Don't sweat over what you can't control anyway. My sense is there's a home you want at the price you want to pay out there.

12. Final Takeaway 2.0: Negotiation is not about charm and making people like you. It's about leverage. Being willing to walk away is enormously powerful. Take care in creating your package so you can do just that.

Thursday, December 19, 2013

You're Judge Judy. Who's Right: Buyer, Seller, HOA, Property Manager or Agents?

I left Remax pretty well convinced that eighty percent of what top management did was work at risk management. I'm pretty sure all of the big box brokers do, too. Look at a so-called Real Estate Sales Agreement, and by and large, you see a legal document describing who gets the earnest money when a dispute makes the transaction fail. In aiding their clients, real estate agents come dangerously close to practicing law, and management works hard to keep agents on their toes and themselves out of legal trouble.

Consider this case.

Mrs. Smith sold her home to Mr. Jones. Both were represented by real estate agents. In the course of the inspection, a hole in the sewer line was discovered. Mrs. Smith contacted her Homeowners Association (HOA) property manager to find out what she needed to do to repair the sewer line. The manager's assistant erroneously informed Mrs. Smith that since the sewer ran through the common area, it was the HOA's responsibility to repair it. Relying on the assistant's email, Smith and Jones completed the sale with no consideration being made for the sewer line hole.

Mrs. Smith subsequently asked her HOA to repair the sewer line hole. The HOA, pointing to the governing documents (Articles of Incorporation and C C&Rs), informed Mrs. Smith that sewer repair was clearly the individual homeowner's responsibility.

The sewer line was still not repaired when Mr. Jones took occupancy. He obtained a contractor's quote for $2,000 to repair the sewer line and had his attorney request payment from Mrs. Smith before completing the work.

Mrs. Smith, in turn, had her attorney request payment from the property management company, claiming that she had relied on its employee's advice that repair was the HOA's responsibility. The HOA's claim that this repair was clearly the homeowner's responsibility was not valid, since she'd relied on a management company employee's statement.

Who should pay?

1. The buyer, Mr. Jones, since he accepted the home in the condition it was in and made no arrangement to withhold funds or reduce the price
2. The seller, Mrs. Smith, since she assured Mr. Smith the HOA would make the repair.
3. One or both of the real estate agents, since their expertise should have better informed and structured the sales agreement.
4. The property management company, since its employee made a misstatement that Mrs. Smith relied upon.
5. The HOA, since it should have known what the property management employee had said.
6. No one, since buyer and seller should have exercised more responsible due diligence.

You be the judge.

Someone's gotta lose

Wednesday, December 11, 2013

Five Big Mistakes Home Sellers Make

People deciding to sell their homes need to approach it as the pricey and complicated transaction that home selling is. Here a some of the biggest mistakes they make.

1. Pricing the home. Look. It's hard. Ever notice how real estate brokers all get goosey at pricing time when they lay that slick CMA down? Too high, and buyers won't look. Too low, and money gets left on the table.  Pricing is part art and part science, so you need to navigate among the hard numbers, market conditions and, frankly, your home's condition and neighborhood. Moreover, buyers are more market savvy than sellers, who've been out of the market ever since they moved in. Buyers eat, drink and sleep market.

2. Thinking you need a real estate broker. The most critical task is to make sure every potential buyer out there knows your home is for sale. In the past, the only way to make this happen was through the local Multiple Listing Service, which required a member broker's services. Now, buyers find homes online through many websites. For pricing, you can hire an appraiser, and a real estate attorney can handle the contract, all which will probably cost less than a commission.

3. Thinking you don't need a real estate broker. Look, let's be serious. Real estate brokers do this for a living. Brokers can do in their sleep what some sellers freak out over. They understand the mortgage market, pre-approval versus pre-qualification, repair contingencies, and who gets what if a deal falls apart. Moreover, they work hard to make sure it doesn't fall apart. Realtor contract forms cover just about every phase of a transaction and were created by generations of lawyers. As for fee pricing, shop around and get referrals. It's gotten competitive out there. If you use a real estate broker to sell your home, he or she may cut you a deal if you use him or her to buy your replacement home.

4. Not fixing everything. Chipped molding, torn carpets, wall gouges, whatever. To a buyer, even such minor items as burned out light bulbs suggest that something larger might be wrong. Get the furnace and air conditioning serviced and make sure all the appliances work. Bad appliances are big fat red flags to home inspectors. As for re-painting and redecorating: If that one magenta bedroom looked good to your kid, understand it will look horrible to most buyers, and instead of sugar plums, they'll see re-painting dollars dancing in their heads.

5. Overlooking stinky. Stinky is hard. After all, have you ever noticed that everyone's house has a unique odor? Most often, these aren't offensive, but sometimes, they're two-second deal killers. Offending odors can come from a variety of sources, but I'm thinking, here, of cigarette smoke, dogs, cat pee, strong cooking (curry, for example, or even greasy range hoods) smells, whatever. Find the source and get rid of it. And don't think those awful floral plugins will do the trick. Not only are they almost as bad, but they shout stinky cover-up.

6. Not eliminating clutter and not cleaning. Okay, I said, five big mistakes, but this one's important. Clutter makes rooms feel smaller and more crowded than they are. Countertops need to be as bare as possible. Remove furniture from rooms, if possible, to make them seem bigger. Get rid of all the pictures and cute school drawings from the refrigerator and stash pictures of family members, Jesus, vacations, and the like into storage. If the kids' rooms have posters on the wall, trap sets, large sound systems and the like, pack them. And don't forget to clean the house, and then clean it again. Buyers hate dirt in corners, dust on furniture, dishes in sinks, toothpaste smears on faucets, and the like. Cleaning is easy, and it's safe to say that buyers' respect level for homes skyrockets when the place is hospital-clean.

There's more, but that should get you started. Feel free to ask any questions or make comments.

Friday, December 6, 2013

The Best Money-making Idea I Never Did

Many of my best ideas ever came while I was shaving. Some I acted on, some I didn't. But the one I'm about to describe was--and still may be--among the best ever. It's not scammy and it's not a get-rich-quick thing. You still have to do it the old-fashioned way by employing focus and hard work.

First, you need to know what SCOR is. SCOR stands for Small Company Offering Registration. It's a federal law, adopted by most states, that allows very small companies access to public capital solicitation without the huge costs and regulatory hurdles required by the Securities and Exchange Commission. Read more about it here.

Under SCOR, a company can raise up to $1 million per year through selling securities to the public. That's not what it was in the 1990s, but it's still a start. Besides, that's per year. It can still make a dent in a startup's capital requirements. Think of it as a micro IPO program.

Second--and I know of only one guy who did this--you can form a REIT (Real Estate Investment Trust) under SCOR guidelines. REITs have their own rules. They must have 100 stockholders. No more than half the shares may be held by five individuals. Ninety-five percent of its income has to come from real estate-related sources (rent, mortgages, etc.) and ninety percent of the taxable income has to be distributed to the shareholders. Read about REIT rules here.

My plan was to form a hybrid REIT, that is, one in which income came from buying discounted mortgages along with owning quality rental properties. The thought was that even a slightly diversified revenue stream would offer investors some stability.

Most people understand rents. You buy a place and rent it out. But by using investor money with a REIT instead of a mortgage loan, the debt load is less and the cash flow is higher.

Although it's more challenging today than in previous eras to make money in discounted mortgages--something that's unfamiliar to even a lot of real estate people--it's still possible. Read this E-how post I wrote years ago on how to do it.

Assuming a good company, the REIT is a good deal for investors because there's a market, albeit a tiny one, for their investment. They can sell their shares and get their money back if they want. And the return can be pretty good--usually above the going rate. It's a good deal for startups, too, because a good business plan and lots of hard work can jumpstart them into a good-sized business fairly quickly.

Most SCOR startups are dismal failures. Dynamic successes are few, one being Willamette Vineyards in Salem, OR. This 2012 Denver Post article tells about two Colorado tech companies that used SCOR.

Using SCOR to form a REIT is another matter. The guy I knew who did it was a real estate broker in Marin County, CA, in the mid-1990s. His company bought a couple of warehouses and some office buildings, as I recall, and it was doing so well that he had to turn away investors. That said, he doesn't come up in a Google search, and I don't know what became of him.

Still, if you're an entrepreneur in 2013, it's a terrific way to jumpstart a real estate investment company. Finding 100 investors is usually not a problem for people already active in real estate. The key to success is a well-crafted business plan and its execution.