Wants verses needs

By your real estate dude

When I was a kid my mother used to say that my eyes were bigger than my stomach. I was constantly piling more food on my plate than I could ever possibly have eaten. It was never more evident than during the holidays, which is probably why I thought to write this. Thanksgiving and Christmas dinners were feasts at which every member of my family was magically transformed into a glutton, often with a bellyache not far behind.

Over the years since, it could arguably be said that I have spent most of my adult life working with people, many of whom suffer from the same disparity between desire and necessity. Consequently, I have come to the conclusion that most of us have an almost uncontrollable desire to have more than we really need. I have not yet decided whether we are born with it. However, I do know that our culture teaches us to be materialistic to the extreme and often to our own detriment. I see this phenomenon regularly in real estate.

Earlier this year I received a call from a young lady who stated with some urgency, “We need a bigger house. I’m having a baby and we need more space.” Naturally, I asked, “How big of a house do you have in mind?” Without hesitation she announced, “At least 3,500 square feet with no less than 5 bedrooms.” It seems that her current home was about 2,800 square feet in size with 4 bedrooms and 2 and one half baths. I was thinking to myself that this new child must be her fifth or sixth when I asked, “How many children do you have?” As if it should have been obvious to the most casual of observers, she replied, “Oh, this is our first.”

After I recovered my composure, my next leap in logic was that she must have some elderly parents or other family members living with her that would account for such an urgent need for a 3,500 square foot house. In fact, her family consisted simply of her husband, herself and the child she was about to deliver.

I inquired about her financial picture briefly and it became quickly apparent that she and her husband were going to be stretched to the absolute limit if they purchased the new home she was describing. In fact, they were already uncomfortably tight in their finances. Frankly, I was very concerned for their welfare and spent the next few minutes explaining my concerns and trying my best to talk her out of it. No deal. She was dead set on making the purchase and insisted that her husband was as well.

Obviously, this is an extreme example, but it is one of many I could cite and they all have the same theme. The couple’s desires far out stripped their needs and their finances, in many cases to their own detriment. You might say their material eyes were much bigger than their financial stomachs. The result is often a bellyache of a situation in which the house they buy owns them rather than the other way around.

In spite of the strong desire for “more” and “bigger”, there are some ways to keep from finding yourself in such an unenviable position when buying a home. One is to make a list of your needs and your wants with the understanding that the two are not the same. I generally suggest to my clients that they make two columns: one entitled “must haves” and the other “would be nice”. It is most important that you be honest with yourself and that you write in the “must haves” column only those things that you absolutely need. Everything else goes under “would be nice”.

The result will be a more focused and honest appraisal of your situation. You will be able to review every interesting property based upon the bench mark you have created with your list. Most likely, you will end up with a home that fulfills all of your needs and has some of the characteristics that “would be nice”. At the same time, you may save yourself from a financial disaster. Unlike many who do not use this process, you will own your home instead of it owning you.

Home Buyers Face Decisions that Affect Their Long-Term Financial Picture

By Shanne Sleder (the loan dude)

Taking the step into home ownership is one of the most important financial decisions a person will make in their lifetime. There are many factors to consider when embarking on this venture. Literally hundreds of loan programs are available, and it is important to find the one that best fits your personal long-term goals.

First and foremost, you must have a mortgage consultant in your corner that is willing to take the time to know what your long-term goals are. Communication is the key factor here.

Curious prospective home buyers sometimes turn to Internet-based services just to see what current interest rates are. But a faceless web site will not take the prospect’s future financial planning into consideration or guide the potential borrower through the many nuances of the loan process. When shopping for a home loan, be wary of web-based services that offer programs to reel prospects in with attractive rates that are based upon unrealistic time frames.

If a lender is offering a terrific rate based on a 10-day lock-in period, it is unlikely that the potential home owner would actually be able to find their dream home, get through the negotiation process and win approval from a lender within such a short period of time. This is called short-pricing, and when it comes time to close the transaction, the rate that was originally offered is simply no longer available. As a result, the unfortunate prospect is bulldozed into a loan program with a higher interest rate.

It is highly unlikely that a qualified loan originator whose business is based upon referrals will use unscrupulous tactics such as this to get new customers in the door!

Once you have found a mortgage consultant that you feel comfortable working with, lay your goals out on the table because it will have a tremendous impact on choosing a loan program that meets your specific needs. One of the most important factors to consider is how long you wish to borrow the money for. For example, if you know you will only be in the home for five years, it wouldn’t make sense to opt for a 30-year loan program or pay points up front to secure a lower interest rate. You would not be in the home long enough to benefit from such action.

Your mortgage consultant should be able to narrow down a selection of programs based on the information that you have provided, and present you with an easy-to-read spreadsheet that clearly defines viable options for your interest rate and amortization schedule, monthly payment and any potential savings you may realize by paying points up front.

Moreover, a reputable loan originator will not hesitate to share this information with your tax consultant or financial planner so they may offer additional feedback on your behalf.

Home ownership imparts a rewarding vehicle for building wealth and a strong financial future. The mortgage consultant that you choose should be there not only when your loan closes, but should also provide you with ongoing service to assist you in managing that debt over time.

Leverage in real estate

By your real estate dude

Ever since one of my grade school teachers taught the class about the power of the lever, I have been fascinated by the basic physics of leverage. As a matter of fact, I found leverage to be quite useful as a young man while working as a construction laborer. It took me no time at all to realize it was a lot easier using leverage when shoveling dirt than it was muscling through it and straining my back. But it wasn’t until I began my carrier in real estate that the idea of leverage took on an almost miraculous meaning.

The term “leverage” as it is used in investing, is a fancy way of describing the use of other people’s money to purchase investments rather than using your own. If I take out a loan in order to purchase a rental property, I am using the bank’s money rather than my own. I am using “leverage”. The use of leverage is very common in real estate. If you own a home, you probably used leverage when you bought it. However, it is not quite so common in other types of investments.

At one time in my life, I tried my hand at the stock market. I took a stab at various stocks, traded here and there and even made a little money on an IPO. Like many of my peers at the time, my eyes were glued to the pulsating values of my meager holdings as I tried, in vain I might add, to turn my little sow’s ear of a financial picture into the proverbial silk purse. The problem was I didn’t have enough capital to start with. If I wanted to purchase $100,000 worth of stocks, I had to cough up $100,000. I didn’t have that kind of money, so my gains in the stock market were small at best and I soon lost interest.

It was about that time that my wife and I purchased our first rental property. My grandfather had been a very successful real estate investor and I felt that perhaps I might be able to recreate his success. The market seemed to be on an upward track, so we took the leap and bought the property in San Diego for the sum of $135,000. We got it rented the first month and crossed our fingers. Two years later, we sold the property for $185,000 to the tenant. After all was said and done and the costs of the sale were subtracted, we had made about $45,000. Taking our net gain of $45,000 into account, our $135,000 property had appreciated by about 33%. That’s a pretty good return in itself, but it doesn’t include the magic of leverage.

You may remember that in order to purchase $100,000 worth of stock, I would have to come up with $100,000. By contrast, using the magic of leverage we purchased $135,000 worth of real estate with an initial investment of only $27,000. We were able to use “leverage” in order to take our light investment of $27,000 and do the heavy lifting of buying an investment worth much more. Just like shoveling dirt as a young man, I discovered that investing was a lot easier using leverage than it was trying to muscle my way through it using my own limited funds. Leverage also had the almost magical ability to increase the amount of money that we made on any given investment. For example: we spent $27,000 and in two years time made an additional $45,000. That was a return on our investment of 166%!

So, what’s my point? If you have not considered the advantages of using leverage in your investment plans, you may wish to do so. Real estate offers a tremendous opportunity in this regard and may well be the investment vehicle you’ve been looking for.

New Home Construction Continues to Decline in California

California housing starts fell for the seventh consecutive month in September 2006, declining 46.6 percent compared with the construction pace recorded one year earlier, the California Building Industry Association (CBIA) recently reported. Based on the number of building permits issued, 11,590 new housing units were started throughout the state in September, the fewest starts during a September since 1996, according to the report.

Despite the decline, California builders are on track to produce 180,000 new single-family and multifamily units this year. CBIA anticipates multifamily construction to remain strong in most markets for the remainder of 2006 but expects single-family starts to fall by 20,000 to 30,000 units compared with 155,000 single-family starts in 2005. "As expected, the single-family sector remains challenged as homebuilders work toward reducing their year-end inventory," said CBIA Chief Economist Alan Nevin.

For more on the story click on the headline!

Association of Realtors Supported Ballot Measures Approved, Proposition 90 Defeated

From the California Association of Realtors Newsletter:

Four statewide ballot measures supported by C.A.R. were approved by voters during yesterday's election. Propositions 1A, 1B, 1C, and 1E passed, authorizing bonds for highway rehabilitation projects, state housing initiatives, flood protection, and levee repair. The Association supported these public works measures because they are consistent with C.A.R. policy and stand to benefit the real estate industry.Voters also voted against two measures C.A.R. opposed. More than 75 percent of voters said "no" to Proposition 88, the measure to increase property taxes by $50 a year to raise money for schools. Proposition 90, which aimed to prohibit the government's right to seize real property, also failed to pass. C.A.R. opposed Proposition 90 because it would limit the government's authority to adopt certain land use, housing, consumer, environmental and workplace laws and regulations, and would eliminate all redevelopment in California.

Real estate statistics: Are we fishing in the wrong pond?

By your real estate dude

In a recent meeting at my office, the subject of “real estate market statistics” came up. What was said might surprise you. But, before I launch into the story, let me take a moment to establish the background.

San Diego County experienced a “seller’s” market for several years. There were a great many buyers (high demand) and very few available properties (low supply). This shift in the supply and demand ratio meant that seller’s had the advantage, and that buyers were forced to compete for the few homes that were available. Consequently, prices went up. Low interest rates, high consumer confidence and a desire on the part of many to move their money out of the sagging stock market accentuated the upward price trend, and the real estate market boomed. The key phrase here is: “buyers had to compete”. If there were concessions to be made, it would be the buyers who made them.

Since that time, the real estate “tide” has turned. Consequently, we find ourselves in the middle of a buyer’s market. There are very few buyers (low demand) and a zillion homes for sale (high supply). The buyers are now in the driver’s seat. It is now the buyers who have the advantage and the sellers must compete for the few buyers available. Thus, prices have stabilized and in many cases come down.

No doubt you have scoured the business news and knew all of this even before I got the bright idea to write about it. But, what you may not know is what Paul Harvey calls “the rest of the story”. Remember, statistics can be misleading. Quite often, they do not contain all of the information necessary to paint a complete picture. As a result, the potential for coming to an incorrect conclusion based upon them is quite real, which brings me back to the meeting at my office.

The subject at hand was the frustration felt by many agents as they have attempted to explain to “buyers” that this truly is the time to buy. In the face of the media barrage of “statistics”, buyers are often reluctant to accept this advice. I experienced this myself in a similar conversation with one of my clients just two days ago. We were having a cup of coffee and talking about this very subject when he said, “People are trying to time the market. They want to wait until prices come down.” He was right, but what he had forgotten was the key to the story. Remember earlier when I said, “The key phrase here is: buyers had to compete”? But the tide has turned, hasn’t it? In our current market, buyers have the upper hand. Today’s key phrase is: “sellers must compete for the few buyers available”. Unlike the previous market, if there are concessions to be made, it is the seller who is going to have to make them.

To drive home the point, we did a little “poll” during our office meeting. Here is what we found. The agents in the office reported that the average concessions given by sellers recently, ranged from $10,000 and $30,000. The vast majority of these concessions were given as “credits” back to the buyer through escrow. For example: the sellers may have agreed to pay the buyer’s closing costs, give the buyer a credit toward repairs or pay for the first year of home owner’s association dues. In each case, the money was paid by the seller out of the proceeds of the sale of the house, rather than simply reducing the price. So, if you buy a home for $500,000 and the seller agrees to give you $20,000 in concessions through escrow, you have really only paid $480,000 for that home. Since you rapped those concessions into the purchase price, the statistics do no report the concessions. Therefore, according to the statistics the home you purchased in this example would have sold for $500,000.

Let’s take it one step further and say that the home in question would have sold before the market changed for $550,000. But, the market has shifted. You paid $500,000. Statistically, we would conclude that the price of that home dropped 10%. But, remember, the seller gave you $20,000 in concessions. Even though you financed these costs by paying $500,000 for the home, the effective purchase price of the house was actually $480,000. That equates to an actual price reduction of 12.7%. So, if you’re sitting back waiting for prices to drop, which is more exciting to see: a ten percent price reduction or a drop of twelve percent or more?

The point is simple: statistics do not always represent reality. When you take seller concessions into consideration, it becomes clear that home “prices” have come down far more than the statistics and the news media report. If you’ve been waiting for home prices to drop before you buy, this is something to consider in your decision making process. When you do the math, you may find that the time to buy is now.