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
Email Me Like My Page Link With Me My Blog 01_twitter 03_youtube

Close To Shopping

Close to shopping, transportation, dining, and recreation.” 

Those are golden words [when true] if used in marketing and advertising a residential listing.  It follows that without one of them, the allure of the home is decreased.  After all, since 1956 shopping malls provided important social and economic environments.  Real estate values have historically resisted massive depreciation when close to shopping malls.

Unfortunately, since 2006 there hasn’t been a new enclosed mall built in this Country. Instead, they are being abandoned and torn down.

If you have been hearing the news about retail troubles lately, it is evident that what I call the “cloud effect” is not a fad and is inserting Power and WiFi into Maslow’s famous pyramid of needs.  (This depiction is not meant to insert electricity outside of Safety Needs nor am I dumb enough to show electricity above connectivity; the former is required for the latter.)

hierarchy-of-needsSo if demographics and behaviors are changing, as they always are, is “proximity to free wifi” the next golden attribute for sellers?  If solar panels could be used to save power (for rainy days), that amenity could be golden, too.  (The economic viability of solar panels is apparently not currently positive; the government has to entice homeowners with subsidies.)

Next time you are in the market to buy and listings are touting proximity to shopping, ask the seller to disclose the vacancy rate and trends of the nearby brick-and-mortar retail entities.  Better yet, the buyer should apply their own values to the house and its location.

 

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
Email Me Like My Page Link With Me My Blog 01_twitter 03_youtube

Real Estate Commissions

Nearly nine out of 10 real estate agents work on commission, and are paid only when the transaction closes. Except for the legal profession, real estate agents are the only fiduciaries and agents who work this way.

Commissions are paid according to the terms of two contracts – the listing agreement, and the purchase agreement. The listing agreement states the total compensation allocated to the listing broker and the amount of that total which is, in turn, promised to the buyer’s agent who 1) writes the offer and, 2) communicates acceptance to their principal.

To simplify how commissions are routed, the real estate industry customarily allows all sales commissions to be paid out of the seller’s proceeds, according to the terms of the listing agreement.

Brokers

According to licensing law, only licensed brokers can serve as fiduciaries. They have “agents” or licensed salespeople who work for them, but they have the legal responsibilities of operating the brokerage. The salesperson license allows salespeople to serve as agents of the broker. They can negotiate contracts, but the seller is actually negotiating with the broker, by proxy. It’s the broker’s company name and signature on the listing contract.

But be careful; a licensed agent may not be a REALTOR® and, as such, is not compelled to follow any laws, conventions, or ethical framework.

2017-01-Commission-split

Distribution

Once the home is listed in the Multiple Listing Service (MLS), the listing broker discloses the terms of the commissions to other cooperating brokers, so they will bring their buyers to the listing. When the buyer’s broker presents a contract to the seller, it will include a provision to collect their share of the sales commission, as offered by the listing agent in the MLS. That means a commission can be split as many as four ways:

  • Listing broker or agent
  • Listing salesperson
  • Buyer’s broker or agent
  • Buyer’s salesperson

At closing, the listing agent is paid by the escrow agent out of the seller’s proceeds, or a day or two later when the buyer’s loan is funded by the lender. The listing agent, in turn, pays the buyer’s agent his or her share of the sales commission.

All commissions are negotiable, but sellers should keep in mind that commissions are incentives.  Skimping on commissions can reduce the exposure of your listing.

Simple Math

In California, it is commonly stated that “sellers pay commission” because the funds are distributed from the purchase price like the sellers’ loan balance.  Frequently, though, the math is overlooked which proves that the buyer pays half of the commission (and/or based on the agent/buyer agreement).

This math is simple because commissions, costs, loan fees, and seller profits all come from the purchase amount, NOT above and beyond the purchase amount.  That means the buyer is providing the money which includes commissions, costs, loan fees, and sellers’ Net.  Then it gets distributed at close-of-escrow.  The analogy is:  A seller provides “an empty bucket” which is filled with the buyers’ money.  The costs are taken off the top of that bucket and the seller gets the remainder.

Commission2

So, when a seller asks for a discount on commissions, if agreed, the seller is giving the buyer a discount too.

P.S., You may hire a discount broker but “you get what you pay for”.  And I’m not a discount broker – my business would not succeed otherwise.  In fact, I am frequently under-compensated for the level of risk and negotiation management that I provide my principals.

P.S.S., In your line of work, do you allow the possibility of no success and no payment?

Bonus for Veterans who hire me My Pledge to my clients
Weichert REALTORS - Galster Group Jay Emerson, Broker
Masters Club – Life Member
Weichert Presidents Club
916-517-9606
“A Guaranteed Smooth Experience”
www.JayEmerson.com
CalBRE#01788488
Email Me Like My Page Link With Me My Blog 01_twitter 03_youtube

Real Estate Should Be Simple

Whether your job requires you to sweep floors, trade currencies, sell houses, or teach kids, you should strive to simplify, not complicate your job.  Is this a strange opinion?  Don’t your customers want a simple experience?

As a former process designer, it was HIGHLY regarded by bosses and customers if resulting processes were more simple [as long as efficacy did not decrease]. What a coup it was to streamline a process.  It’s just like clean programming; you can’t have enough of it.

The extreme conclusion from this endeavor for “simplicity” is that the process/job is eliminated. “No code is the only perfect code”.  Human imperfection and evil find their way into processes, jobs, and programs.

This diatribe has a reason: If my greatest professional goal is to improve (“simplify”) the real estate endeavor for sellers and buyers (the ONLY customers), then I would focus on improving the process that affects THEIR experience. For example, I would assign someone to get rid of the Consumer Financial Protection Bureau (CFPB). This Board adds more friction in the process and does little to protect the consumer. The CFPB is a dangerous attempt at seizure of the industry by the government.  Did you know that the CFPB has nobody to watch them?  They are “immune” to oversight.

Another focus would be to assign someone to get rid of the EPA (except for air and water). There are so many points of complexity in the real estate industry just due to the EPA that any reduction in that Agency’s presence would improve experiences and costs for sellers and buyers.

Real Estate should be simple.  Or am I nuts?  Let me know.

 

Bonus for Veterans who hire me My Pledge to my clients
Weichert REALTORS - Galster Group Jay Emerson, Broker
Masters Club – Life Member
Weichert Presidents Club
916-517-9606
“A Guaranteed Smooth Experience”
www.JayEmerson.com
CalBRE#01788488
Email Me Like My Page Link With Me My Blog 01_twitter 03_youtube