SubscribeBuydowns and the Bottom
March 31, 2009
If you were in the market to buy a $2,000,000 home home in the Bay Area, would it make a differnce to you if the monthly investment was less than $5,000 with a 30% down payment? And I’m not just talking about the mortgage payment, I am talking about complete, tax adjusted cash flow including a 4.25% 30-year mortgage fixed for 10 years, property taxes and homeowners insurance. Sound too good to be true? It’s not. And yes it beats market rental rates by thousands.
Interest-rate buydowns are one of the most effective methods for both buyers and seller to obtain what they want, which of course is value. For the sellers, buying down an interest rate can have up to 8X the power over a price reduction, depending on the cost to buy the rate down. For buyers, a lower rate means higher qualification and bragging rights of having the lowest mortgage rate on the planet. In the example above:
- If the buyer was qualified up to $1.8mm at 5.5%, they are now qualified at $2mm at 4.25%
- The seller only needs to invest four points or $56,000 to move the buyer $200,000; thus a $56,000 investment saves the seller about $144,000, which is therefore about FOUR TIMES more effective than reducing price
I use the example above since I have been receiving a tremendous amount of inquiries about what’s happening at the higher end, which are those homes selling at $1.5mm+, and whether creative financing has been more common than not. What we’re seeing is that creative financing, like interest rate buydowns and seller financing, are definitely more common at all price points. But what’s been rather fascinating to watch is that many sellers are becoming less inclined to reduce price, despite the fact that prices are off by between 7% to 17%, depending on which city the property i located. Yet, sellers have been very open to concessions that help them keep their price, despite the net proceeds being reduced. One of the reasons for this, in my opinion, is the fact that buying activity has skyrocketed on the last few weeks, which is obviously encoraging to sellers.
So what’s drivng the buying activity? Well, for starters, it seems like many buyers properly sensed that we’ve hit the proverbial “bottom” of the real estate market, which was recently confirmed ed by the exisitng home sales figures that came out last week. That’s right, not only are sales of both exisiting and new homes up significantly (4.7% and 5.1% respectively), the US median price and average price were both up in February over January. Add this data to the fact that interest rates have set a new low record, plus further validation from one of most respected economic forecasting sources avalable, the UCLA forecast, that 2010 will be a year of recovery, and it becomes clearer and clearer that there couldn’t be a greater opprtunity to buy real estate.
No tag for this post.Change, Logic and Money
January 23, 2009
January is a month typically filled with many things inspirational, and I must say that January 2009 appears exceptional. In listening to Obama’s inaugural speech on Tuesday, my own interpretation was, “The power of change begins with me. With you. The sooner we all believe that we can change things for the better, the sooner we ACT to make things better.”
Would you like a tax credit of $7,500 for buying a home? And I mean a REAL credit, not the 0.00% loan that the 2008 stimulus package was enactingfor firs time home buyers? Well, that’s the latest possible modification going forward as part of the 2009 Stimulus Package, and it’s NOT limited to first time home buyers. There’s discussion that ANYONE wanting to buy residential real estate will be entitled to this $7,500credit. As you know, a tax credit directly offsets the amount of federal tax that you may owe the federal government—it’s not a reduction in taxable income—which makes this a very compelling reason for would be home seekers and investors to make a purchase this year.
Want another compelling reason why the smart, savvy buyers are acting sooner than later? Because they know that average appreciation rates in California are 8.8% over the last 40 years (yes we all know that the Peninsula is much greater), and today provide an opportunity for both tremendous value and cheap financing. Let’s think about real value for a moment. The last year we had average appreciation in California, it was the year 2001 (8.7%). If we strip out the overbuilt areas of California.., and concentrate specifically on areas where housing expansion is extremely limited, like the Peninsula, one can simply take the median price of comparable homes in 2001, add 8.8% appreciation per year, depreciate appropriate improvements to the property and a value may be derived. Thus, if a would-be buyer can obtain a home at that value or better, and combine the cheap cost financing, that’s an ideal move on a fundamental basis, whether the purchase is for shelter or for investment.
Want more? OK. How about the fact that, since 1968, there have only been four real periods of decline: 1984 (0.1%, so not really), 1990 (only 1.2%, despite the Loma Prieta earthquake in October 1989), 1992-1996 (Average of 2.44% despite a major recession following a major earthquake) and today (yes, believe it or not, there was NO decline for CA as a whole in 2001 when the stock market crashed; in fact, it was up 8.7% in 2001 and up over 20% in 2002. All the more reason why 2001 is a good basis to use.
Want even more? “Thank you, Sir, may I have another?” Sure. How about the fact that I have personally bought at a low point (1994), sold and bought at a high point (2000), sold and bought at a mid point (2004) and came out ahead EVERY time. In fact, that stepping-stone approach toward buying a home in Palo Alto without a trust fund was a goal realized solely because of real-estate appreciation. On that note, let’s review again the fundamentals of buying real estate for both the person seeking shelter and the person seeking an investment.
For those seeking shelter, it does not matter which price point one is buying at today, as there is good value on property and cheap money available now. It also matters very little at this point whether we’re at the bottom of the current cycle. The reality is that interest rates across the board, combined with attractive pricing, have made it far more financially advantageous to buy versus rent. And with a 5-year holding period, equity is protected and an increase to net worth is likely. For those looking to buy their primary residence, and who are also trying to time the market, they will likely be settling for less desirable property at a higher cost…
For those seeking investment, there are properties everywhere that are positively cash flowing, thanks again to a strong combination of value and very cheap financing. A recent example I looked at was a 4-plex here on the Peninsula going for about $900k, and it POSITIVELY cash flowed with only 10% down! To boot, if the client had 30% to place, it would yield a capitalization rate of almost 3%– that’s HUGE for residential property investment on the Peninsula!
What about financing? Mortgage banks offer the greatest breadth and depth of available programs, but large institutions with reputable loan professionals are a good alternative . As you may have heard this week, Chase is the latest major player to cease brokerage operations (yet they are still buying paper from mortgage banks) making it tougher for brokers to source money. Rates on conforming programs have risen in recent weeks, but rates are still very attractive around 5%. Further, rates on non-conforming/jumbo programs have also been very attractive at rates BELOW 5%.
Please keep in mind that seller financing is an ideal way for buyers to buy more valuable property while protecting their liquidity and sellers to obtain a great investment while selling their property at a reasonable price. Many are waking up to this option, which will undoubtedly move greater inventory.
No tag for this post.Which Job Would Be More Frustrating: Social Media Manager at NAR, or Clothing Manager at a Nudist Colony?
October 9, 2008
I’d say it’s a toss-up. At least at the nudist colony there might be some, uh, ancillary job benefits, while the NAR position would require moving to Chicago. And that’s just a start.
Alerted by several folks, including those at NAR Wisdom, about NAR’s new “Social Media Manager” position, I find myself puzzled. NAR and its state and local brethren are, at heart, finely tuned political action machines — that’s what they’re built for, it’s what they do best, and it’s what you would expect from a trade union. I remember a year or so ago a small local town — Atherton, I believe — thought a good new revenue source would be to tax Realtor (r) commissions at the point of sale. Dozens and dozens of Realtors showed up for the town hall meeting — practically more Realtors than the town had citizens! These Realtors came from far and wide, and very few of them had anything to do with Atherton. They came to show their extreme displeasure at this move, afraid that if it passed, the idea would spread like a cancer to neighboring towns. Needless to say, the measure got voted down.
NAR is also great at getting out its message — very consistently — that it’s a great time to buy to sell to buy and sell to buy, sell, skip, and jump!
What exactly would a social media manager do at NAR? Send out Twitters about NAR’s latest rosy forecast? Alert everybody that Lawrence Yun is about to send another update? There is simply too much of a disconnect between NAR’s stifling corporate culture and the social media world. I imagine all blog posts would need to be cleared by a hundred-person NAR subcommittee.
I know they’re well-intentioned, and I give them credit for trying, but give it a rest, guys!
If somebody does get this job, I’ve got $50 that says they don’t last any longer than Mr. Luther did at move.com Any takers?
No tag for this post.The Tweet-Cops — Law Enforcement’s Use of Social Media
October 9, 2008
Despite being a late adopter of technology generally, the real estate industry has embraced social media better than most industries have, and arguably behind only politics and technology. Here’s an interesting use of social media from a completely different industry: law enforcement.
Joanne Fraser, who sells real estate in Los Altos CA, informs me that a local police department (Mountain View) is now on Twitter. (See here.) They don’t have a lot of followers or updates yet, but kudos to them for embracing social media as a way of staying better connected to the community.
Turns out the Scottsdale police department is also in on this.
Neither Scottsdale nor Mountain View, however, are still quite “there.” They’re using Twitter right now only as a way of disseminating information:
14 year old takes seizure medication. It is unknown when she took it last. She has long brown hair and is wearing green shirt, blue jeans.
SPD in area of 28000 N. 59th Place in reference to a missing juvenile female. It is beleived she is on foot in the desert area to the east.
Here’s where they’re missing out: they could also be using Twitter to receive information from the public about law enforcement issues. The Scottsdale PD is only following some 18 Tweeters (mostly local news stations), and Mountain View isn’t following anybody. Think of the increased power of the medium if they both followed all Tweeters in their area!
Twitter could become a supplemental 911 system:
Help! My house at 123 Main is being broken into!
I’m in the parking lot on Main & 1st. Lights are out. Suspicious looking guys are walking around, flashing lights into the cars.
Twitter could also act as a neighborhood “early warning system”:
What’s with all the boarded-up houses over on the West side?
Traffic is backed up on Marsh all the way to 101! Accident?
Of course, if a local police department were to follow 500 local residents, it’d be difficult for them to keep on top of all that content, especially with looming cutbacks in government services. Solution? Create searches in search.twitter.com for key words like: Help … Accident … Break-in … Robbery … Broken window …
Twitter is rapidly growing up. It’s no longer just an interesting way to spend time: it’s now becoming a credible and powerful way for organizations to disseminate and receive valuable information.
No tag for this post.McCain’s debate night bombshell
October 8, 2008
Did you see the debate last night?
During one of the questions about the economy and the financial crisis, McCain dropped a bombshell!
When Tom Brokaw asked about what needs to be done to help the housing market, McCain suggested that Government should buy back all these defaulted loans and then give these people new loans at the current market value of the home. Hmmmm. Will this work? I think not. Why?
Well, let’s see how this would work…
- Joe Homeowner has a house that he bought for $500,000 with a loan from Fly-By-Night Subprime Lending, Inc.
- The house is now worth $400,000
- Joe, like everyone else, has lost a lot of equity in his home
- Unlike other Americans who are responsible and ARE paying their mortgage, Joe qualifies for the Government to buy back his subprime mortgage, because he’s NOT paying his mortgage.
- The Feds buy his mortgage for $500,000 and immediately give him a new mortgage at $400,000, which he may or may not be able to afford
- So now Joe is happy, but only until he can’t make his payments again…
- Good ole’ taxpayers absorb a $100,000 loss
- Multiply by millions of upside-down loans.
So let me ask one simple question - Does this make sense to you?? I suspect there will be a lot of responsible homeowners who are diligently paying their mortgage who will be awfully pissed off that they won’t be getting THEIR mortgage bought by Uncle Sam and reset to current market value.
Don’t get me wrong - I am not against McCain, and this isn’t about one presidential candidate or another. I’m simply saying that this plan does not make sense. However, I haven’t heard either candidate or anyone in congress or the treasury or the federal reserve or the private sector suggest something that might actually work to solve this mortgage mess. Although today, Barack Obama rejected McCain’s plan, and his economic adviser said that McCain’s plan would cause the U.S. Government “to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don’t recover. The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud.”
Let’s hope that someone is smart enough to figure out how to use that $700,000,000,000 to get the housing market back on track.
In the meantime, I’m proceeding under the assumption that for the forseeable future, people will need to do a short sale and get their lender to take the loss. So if you know of someone who is underwater and stuggling to keep up with their higher payments as their loan resets to a higher interest rate, tell them you know a foreclosure consultant who can help. I’d be delighted to talk to them.
Tags: bailout plan, financial crisis, mortgage bailout, short sales, subprimeAre Digital Cameras And PDA’s Really The “Latest In Advanced Technology”? That’s What CAR Thinks!
October 8, 2008
From the “What decade are we in?” department, comes this choice gem of a promotional email from our good friends at the California Association of Realtors. They’re running an Expo next week, and a promotional email just arrived in my inbox, from which I quote:
Don’t miss this opportunity to learn the latest advances in technology such as text messaging, picture messaging, camera phones, PDAs and many other technologies…
And in the next room, we’ll be talking about fax machines, rotary phones, and photocopiers!
The full promo:
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| Take home MAX’S TOP TIPS A Technology Survival Guide for PDA-Smartphones and Digital Cameras Technology is evolving, and it is affecting our lives and our profession. Don’t miss this opportunity to learn the latest advances in technology such as text messaging, picture messaging, camera phones, PDAs and many other technologies that agents are using to maximize their marketing and communication. Sign up to attend the REALTOR.com® Workshop October 15
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| You must register separately to attend the C.A.R. REALTOR® EXPO Oct. 14-16, 2008  |
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Let’s End The Housing Crisis Here And Now … A Modest Proposal For How To Spend The $700BN
October 7, 2008
Even us “glass half-full” types have to admit the news these days is bad. Any day Congress passes a $700BN and has to tag on only another couple billion or so of Christmas ornaments to get it passed, well, on that day, you know things were urgent, and they had to act fast. Wooden arrow manufacturers, Caribbean distillers, and certain other recipients of congressional largesse pork may be quite happy now, but hopefully the remaining $700BN will be spend actually trying to solve the problem.
And that’s where my modest proposal comes in.
Fundamentally, this crisis is about housing values, or more specifically about uncertainty around housing values. Behind most of the bankrupties, the bailouts, the CDO-thing-a-majiggies … lies a portfolio of mortgage loans whose value is … 3 cents on the dollar? A dime? A quarter? 47 cents? Nobody knows, and therein lies the problems.
Our fearless leaders have proposed spending the $700BN largely on buying these “non-performing assets.” By some financial wizardry, the exact same folks who could not determine the value of these assets in the private market, are about to get hired by Uncle Sam to determine these assets’ values on the taxpayer’s dime.
So here’s what we do instead: Let’s spend that $700BN buying not the mortgages, but the underlying homes themselves. Let’s say homes in the US have an average value of $200K. [Pause for my west and east coast readers to chuckle.] $700BN divided by $200K is … 3,500,000 (three million five hundred thousand.)
That’s right. With $700BN we could buy a couple of million homes. We’d start by buying, say, 75% of the inventory on the market right now. That should restore confidence in the market pretty quickly.
Presto! Problem solved.
No tag for this post.And Another One Bites The Dust…
September 25, 2008
Apparently at least a handful of government financial regulatory employees were doing something today other than figuring out how much money Wall Street needs to keep from further imploding…
The New York Times reports that JP Morgan Chase has taken over troubled lender Wamu.
What next?
No tag for this post.What’s Happening In This Market? A Liberal Dose Of Mixed Metaphors To Help Us Understand It
September 18, 2008
Movies. Shoes. Phases. What do they have in common? All have been recently used as metaphors describing the economy or predictions of where the economy is going.
On the day that the Fannie and Freddie s$#@ hit the fan, Sherry Chris of Better Homes and Gardens Real Estate quoted Realogy CEO Alex Perriello, “I feel like I am in Imelda Marcos’ closet - the shoes just keep dropping.” Indeed.
Fast forward a few days and we get the Bawld Guy, America’s foremost maxim-generating machine, reassures us that we ain’t all gonna die. He’s seen this movie three times before, and the asteroid doesn’t hit earth.
Finally, Nikcolai Kolding, also of Better Homes and Gardens, brings out an interesting diagram explaining the phases of the real estate market:
["Sides", for the uninitiated, refers to each of the two "sides" of a transaction.]
The diagram suggests that transaction volume, not price, is the best leading indicator of a change in the market. In a future article I’ll see how well our local data fit into this model.
No tag for this post.See Tim Ferriss Speak in San Francisco. Discount Code BIZSCY148
September 15, 2008
Hello ladies & gents
I know this has nothing to do with staging 
But many of you who read my blogs know I am passionate about technology and its application to small businesses. My business certainly has benefited from technology tremendously and I would not have found the success that I have without using technology to streamline processes and lower my overheads.
With that said, I am one of the co-organizers for BizTechDay and I just found out we have booked Tim Ferriss of 4-hour Work Week for our keynote!
Here are the details:
BizTechDay – Technology Bootcamp for Entrepreneurs and Business Owners Saturday October 25 All Day Event
BiztechDay is the only conference that puts your business first before technology. Come meet Timothy Ferriss, best selling author of 4-Hour Work Week and George Wright (Marketing Genius behind the YouTube WillitBlend Campaign) and learn hands-on steps and ideas to take your business to the next level.
When: Saturday, October 25th, all day event
Where: Hilton San Francisco
333 O’Farrell Street,
San Francisco, CA 94102
Who are Speaking?
* Timothy Ferriss - New York Time Best Seller and Author of Four Hour Work Week
* George Wright – VP of Marketing from Blendtec (WillitBlend – one of the most successful Business YouTube Campaigns – 700% increase in Revenue)
* Megan Casey - Editor in Chief from Squidoo.com (Top 500 websites in the World!)
* Yaniv Bensadon - CEO from Fixya.com (one of the most popular Tech Support website in the world)
* And many more!
Why Attend BiztechDay?
* Learn from business and technology who speak your language
* Get ideas and hands on steps so you can also put the internet to work for your business right away
* In-depth workshops and panel discussion to get you up to speed on essential tools you must have for your business
* Network and meet like-minded entrepreneurs and business owners (like you and me!)
What You Will Learn:
* How to Use Linkedin/Facebook/Yelp to Promote Your Business (+ 20 more websites)
* How to Collect Money Online Using Paypal, Google Checkout & Amazon Payment
* How to Develop Your Own YouTube Video & Podcast to Market Your Business
* How to Setup a High Traffic Business Website & Basics to Search Engine Optimization
* How to Setup a Successful Email Marketing Campaign
* How to Create Your Own Social Network and Build Your Customer Base
* How to Promote Your Event & Get Hundreds of People
* And many more!
Most of the topics are very applicable for real estate professionals. A lot of us have used social networks to promote our businesses. SEO certainly doesn’t hurt
TO YOUR SUCCESS!
Cheers,
Cindy
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Contributors
Kevin Boer
Broker/Owner
3 Oceans Real Estate
Menlo Park, CA
650.387.2860
(DRE 01404898)
Chris Iverson
Realtor
Ventoux Homes
Palo Alto, CA
650.450.0450
(DRE 01708130)
Christine Kani
Mortgage Broker
Equitas Capital
San Jose, CA
408.200.3816
(DRE 01730869)
Cindy Lin
Stager
Staged4More
Burlingame, CA
650.293.7458
Bart Marchioni
Realtor
Keller Williams
San Jose, CA
408.266.3100
(DRE 01385188)
David Roberson
Attorney
RHRC
San Jose, CA
408.261.4252
Eric Trailer
Mortgage Banker
Absolute Mortgage
Palo Alto, CA
650-493-3600
(DRE 01361721)
