Buyer Beware

If you are a buyer in the Sacramento, El Dorado, and Placer counties, you are currently participating in a Seller’s Market. According to historical definitions, which may not hold any more, when inventory is selling quickly, buyers are in competition and sellers therefore have more leverage.

Risk and Leverage are key forces to manage in your strategy. This strategy must begin with your mindset. But your starting positions for each (Risk, Leverage) go on your purchase offer. That is how a seller picks winners. (But your and your agent’s behavior can also make or break your chances. “Behavior” is a discussion that only my clients get to have with me.)

Risk and Leverage are tangible elements in home sales. And they usually move in the same direction when a buyer or seller makes a decision. For example, when a buyer decides to waive their appraisal contingency to increase the allure of their offer, both their Risk and their Leverage increases. And if the buyer refuses to heed the recommendations of their inspector, it will increase their Risk (of subsequent expense) and, at worst, could have no effect on their Leverage.

After many years of analyzing, presenting, and advising my sellers in the acceptance of an offer, knowing some of these factors will change in time and must change to reflect the market

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  Jay Emerson, Broker
Masters Club – Life Member
Weichert Presidents Club
916-517-9606
“A Guaranteed Smooth Experience”
www.JayEmerson.com
CalBRE#01788488
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Making a Show Yard

After years of weeds, dreams, and more weeds, our yards are becoming worthy of pride and entertainment. (Many of you will be invited.) I would much rather post my accolades here than on Yel* or An*ie’s List.

There have been 3 key success factors in our current project progress:
1. Start with a design and try to make it “to scale”.
2. Hire wisely. Your first hire needs to understand and help architect the sequencing of implementation.
3. Don’t pretend to know more than the hired professionals.

My design is very elaborate. I segmented our parcel into 8 pieces (only 4 are relevant to this article; Alley, Back, ESide, WSide).






As my lead landscape implementer, I hired long-time friend and professional Mike Neeley (Waterless Landscaping).

As my concrete implementer, I met, hired, and became fast friends with Moni Fotofili. If you want concrete done well, you won’t be disappointed with Fotofili Concrete.


I’m very happy with the work they have done so far.

Psychology Matters

Psychology and Effect

Instead of “cause and effect”, there are times when changes in the price of a house can be correlated to the change of the cost of loan funds.  But the reaction to the change in mortgage rates was psychologically driven – 3.99% is not much different than 4.26% but it’s a coup to get a rate “below 4%”.

Our government loves to help and the reduction of mortgage rates (specifically the 20 months from November 2011 through May 2013) were below 4% for the first time EVER!  Those same 20 months saw a total increase of 57% in the median price in Sacramento.  And Cash buyers peaked during that same time.  Investors were betting that prices were at a relative bottom. 

Since September ’13, the total increase in that same median price has only been 21%. For the entire period since November ’11, the increase in that Sacramento median price has only been 85%. In my opinion, the reduction in mortgage rates below a “psychological low” of 4% in 2011 led to a sharp increase in prices when inventory was very low – BECAUSE most sellers still had a psychology of “no equity” so didn’t try to sell and the foreclosures were drying up. There was no source of inventory to mitigate the demand in those 20 months except foreclosures which were starting to decrease.  And cash buyers were outbidding borrowers every time.  And then there was Blackstone and their ilk.

In fact, all 3 county median prices hold to that same increase – in the first 20 of the 67 months from November ’11 through now (May ’17) is when 50% of the price increases occurred.  That is 30% of the time (20/67 months) accounts for 50% of the appreciation (SA $165K-$344K, ED $240K-$467K, PL $245K-$462K).

So What

The good news is that buyers have refused to be lured into the price wars that resulted in the peaks in 2005-07.  The bad news is that the momentum has been stalled since the end of 2013 and continues in a lackluster way today – except for the nice homes under $400K (screaming off the market with multiple offers). 

Even though most of us have more equity now, employment opportunities (minus the costs and impacts of relocating) are still needed.  Jobs are still lacking.  Sure, there are a lot of jobs but not the kind of jobs that justify TWO mortgages (one being health insurance).  Gift letters are more common and some lenders are even providing the gifts.

There are loan programs.  There are fewer jobs.  There is more expense in a buyer’s budget.  Sellers must have an opportunity, too.  Affordability is not improving.

Jobs would be the best solution to our market “pickle”.  But congress is too comfortable to think and act big.

 

Bonus for Veterans who hire me My Pledge to my clients
Weichert-Galster-Group-JE Jay Emerson, Broker
Masters Club – Life Member
Weichert Presidents Club
916-517-9606
“A Guaranteed Smooth Experience”
www.JayEmerson.com
CalBRE#01788488
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Real Estate Financing and Investment

How real estate financing occurs tells me a large part of the market “story” each month. (I am not an investment advisor.  I am a real estate broker with a love for data, trends, and helping others with their story.)

Financing Trends

In analyzing this months’ data, it appears that Real Estate has become a regular place for investors to put their cash. I think the draw is due to the decrease in opportunity costs (savings rates) and then depressed by pressure from rising prices. I think the reason MORE cash is NOT being moved into “dirt” is because the equity/commodity Newscasts are stealing investor attention (and rising prices = decreasing yield).

This chart shows me:

  1. The entrance and abundance of FHA financing erodes the use of down payments (“skin in the game”) and therefore equity in real estate, and
  2. The entrance and continued use of cash financing means there are successes which begets more cash (and mitigates the loss of equity from FHA and VA).

The question you are probably facing: Is the timing right to bet on rental income (and maybe appreciation) rather than the better uses of our cash?

The most important 3 words in Real Estate SHOULD BE DIFFERENT for investors than those building a family. For a family that is buying a home, Location Location Location have long been the most important 3 words. However, for an investor, Timing is fundamental and always present and takes precedence to Location.  But, like any other investment, your tolerance for risk (and a licensed advisor) will help guide your decisions.  And, like any other investment, Timing is important.

Making Money in RE

These are the ways to make a profit in a real estate commodity:

  1. Cash-flow – This is like having a Dividend-paying stock in your portfolio; you value the periodic payments. (You still want to be favored by Timing when you sell.)
  2. Appreciation – This is like selling a stock at a price higher than when you bought it. This is what the typical homeowner wants and makes the Cash-flow investor happy, too.
  3. Building – Acquiring the empty dirt, adding a residence, and selling for a profit.
  4. Flipping – Like being a builder, you are purchasing low, adding value to an asset, and selling high.

Cash-flow

A Cash-flow investor has a longer-term strategy that includes holding the rental property.  Whether the benefit is because of taxes or personal reasons, it remains true that “holding” real estate is how wealth is built, not “selling” real estate.  “Holding” means you’re getting rent payments (unless you’re “banking”).

Appreciation

Appreciation is a longer term strategy unless you’re Flipping without adding value.  That’s just arbitrage and doesn’t work very well when a bank, appraiser, government entity has some power over your eventual sales price.  There have to be comps and reasons your price jumped so much in a short amount of time (arbitrage).  Banks don’t appreciate other people making money; their money.

Building

Building is a special art and requires a lot of capital.  This is the birthplace of what we call “home”.  It is also the birthplace of multi-family dwellings.  Demographics affects profit and, therefore, builders want to match projected buyer desires to construction details.  Timing is critical.  Location is critical.  Insurance and longevity are expensive.

Flipping

Then there is the investment activity known as “Flipping”.  Simply put, Flipping requires working backward with the profit-chain to determine whether an asset is a good candidate for purchase and re-sale.  For example,

  • you have $200,000 to invest
  • your investment opportunities are limited to Flipping (determined by your Time and Money rules)
  • you want to make at least 10% in the Flip of an asset
  • a home is priced at $112,000 – the comps may support $212,000 with upgrades – kitchen, bath, roof, yard costs $25,000 – contractor and regulatory costs $25,000
  • spending $112,000 and $50,000 in upgrades could yield 31%; you could spend $65,000 on upgrades and still make 20%, notwithstanding the time it takes to achieve that return.

Barriers exist for any investment activity.  Specific to Flipping:

  • Regulatory costs
  • Market unknowns
  • Construction skills and availability

Being a real estate investor without guidance and help is sure to cause you pain.  Let me know if you have questions, needs, or if you have any feedback (or post it here).

I’m sure someone will have another way to make money in real estate.  Share your ideas. 

 
Bonus for Veterans who hire me My Pledge to my clients
Weichert-Galster-Group-JE Jay Emerson, Broker
Masters Club – Life Member
Weichert Presidents Club
916-517-9606
“A Guaranteed Smooth Experience”
www.JayEmerson.com
CalBRE#01788488
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