Real Estate Investing

Working with a new homebuyer, we looked at our first house yesterday.  It was a bank foreclosure and needed about $20,000 to $30,000 in repairs:  new roof, new floors, lots of additional work that would add up quickly.  Time was of the essence since the listing agent informed me that she already had another offer.

He wanted badly to immediately write a contract because bidding against someone else causes a desperate sense of urgency that is not always necessary.  We took this morning and looked at six more homes - all of them were equal or better than the first one and didn’t need a lot of work.

“Buying a house should not be like buying a candy bar in the check out line of a grocery store,” said Michael Hendrickson, a property manager and real estate agent in Middle Tennessee.  “A lot of buyers see something they like and immediately want to purchase it without due diligence.”

Michael compared buying a candy bar with buying a house, “An attractively wrapped chocolate bar is high in calories, cholesterol, and fat and definitely not good for you in the long-term.  That’s the house a buyer sees, but there are many more houses (and candy bars) on the shelf.  You do your research and find that a peppermint patty is better because it has no trans-fats.  And there are a lot of peppermint patties on the shelves too.”

The same goes in today’s housing market.  You might see one you like, but it’s important to look at all the information on the wrapper.  Just down the road could be a new construction that’s move-in ready for just a thousand dollars more than what you’ll ultimately pay for remodeling the original home.  The benefit?  You won’t have to put on a new roof, new carpet, new paint yourself, and can probably get a builders warranty and be comfortably settled in your new home within 30 days.

When you go to the market, everyone looks for sales but sometimes bubba cola can not replace the real thing.

It’s a candy store for buyers.  Shop wisely.

Photo from here.

I met with a new buyer yesterday who lenders today would be drooling to gain as a client.  He is highly qualified to buy with no real debt, excellent credit, and a great job.  He has already spoken to a very big, very well-known bank about getting a mortgage and what they told him absolutely shocked me from my head to my toes.   But let’s back up …

Recall how this current housing crisis has been caused because banks and lenders pushed people into more house than they could afford.  The people who bought are just as much to blame because they didn’t make sensible decisions but rode the wave of elation that they could buy a much bigger house than they first thought!  Now our economy is in the tank because there have been an insane amount of defaults on mortgages.  Banks / lenders sold these bad mortgages to the big boys on Wall Street who bought them in bundles.  Now there isn’t enough capital to cover the investments and homes across America continue to empty out, all the while neighbors watch houses deteriorate and weeds take over once beautiful yards.

And the Washington politicians feud, grandstanding and arguing during this pivotal election year, an election whose results will quite possibly determine the future economic success or failure of our great nation.

And it all trickles back to my buyer.  He’s sensible.  He’s ready and qualified to buy.  He and other people like him are the key to recovery.  Again, he spoke to the lending department of a major bank this week.  They told him he was qualified to spend up to FIFTY PERCENT OF HIS CURRENT INCOME on a monthly house payment.  Whoa, Nelly.  Come again?  Yes… they told him - even given today’s financial crisis that’s threatening to bring our nation to its knees (and brought the Secretary of the Treasury yesterday to his knee) - that he could spend 50% of his current income on a house payment each month.  Fifty percent.

I find this unbelievable and appalling that people are still being guided to make ridiculous decisions like this when the general rule of thumb is people should spend 25 to 33 percent of their income on a home.  What if my buyer decides to buy a car?  Or gets a credit card?  Or has a medical emergency?  At 50 percent, he would be unlikely to save money toward any type of future emergency.  Even as I rant, though, millions of people do spend half their incomes on mortgages.  The Truth About Mortgages (dot com) reports that according to a 2007 Census Bureau report, over 7.5 million homeowners do just that,

Last year, 38 percent of homeowners with mortgages spent 30 percent or more of their income on housing costs, the limit the government considers affordable.

And more than 7.5 million people, or roughly 15 percent of American homeowners with a mortgage, spent half of their income or more just to pay the mortgage each month.

One blogger says the roots of this current crisis go deep.  The root cause is the basic financial mindset of American society,

We have a collective psyche that refuses to accept that there are limits on what one person can or should acquire, refuses to delay gratification, constantly pushes for more, bigger, faster, shinier things. Our entire economy is predicated on the endless acquisition of material goods. That, and deep-seated insecurity about our own positions in the world.

I’ve heard for years that this consumer market doesn’t put enough money into savings.  Maybe this scare will spur people to take a long, hard look at their spending habits so they can finally see that savings accounts are perhaps better than that new 52″ flat screen television. 

Meanwhile, my buyer was just as incredulous as me when he heard the “50 percent” price.   I asked him to work on a monthly budget plan so he can realistically determine an amount he’s more comfortable with.  He has to do this because obviously some lenders are still pushing buyers into more than they can afford.  Together, we’re looking at home prices that reflect 25 to 30 percent of his income.

Poopsie Pup picture from here.

Most Realtors like to talk.  They have to be somewhat outgoing, knowledgeable, and informed about the world around them in order to provide good service to clients. When we aren’t talking to customers, we’re talking to each other and this is how I came upon some really great insights from one of the best agents around.  Justin Holder grew up in the business.  Because his Mom and other family members are agents, it was a natural fit for him.  But you won’t find Justin resting on his laurels and counting on family to throw him leads.  He works hard to connect with people and when he does, he expertly guides them through the sometimes volatile home buying and selling process.

Justin agreed to let me share his thoughts and insights on how to be successful in today’s interesting market.

Every Thursday, I’m on an hour long conference call with some of the top agents in the country.  There are about 70 of us on the call- all committed and obsessed with excellence in our business.  We discuss what’s happening in each others markets- from Hawaii to Huntsville, we are always tracking trends. This week, as we discussed the status of real estate, both nationally and locally, one of the agents summed it up perfectly.  He said “we’re in a pricing war and a beauty contest.”  Those few words summarized everything I’ve been telling my clients over the past months.  What does that mean?  I’ll explain both:

Pricing War.  Over the past couple of years, we’ve seen inventory increase in some pricepoints beyond what the demand has been.  For example, at one point the construction of homes $300k + was far exceeding the amount of folks that were looking to purchase in that price range.  So, as builders realized this, building slowed to allow these homes to be absorbed (purchased).  However, we’ve now not only seen builders offer hefty incentives to sell these homes, we’ve also seen existing homes try and compete…by dropping their prices as well.  Not only does this result in diluting of property values, it also reduces the amount of equity that homeowners have worked so hard to build.  Drastic, continual reductions are not always the solution.

Beauty Contest.  Let’s say you were in the market for a new car, say a Nissan Maxima for example.  If you were to hit the road, searching dealers, you’d have a lot of cars from which to pick.  There would be some that showed horribly - they’ve not been well maintained, the paint is worn and they’re not worth the price.  There would be some that would just show vanilla - clean, well kept, but nothing special.  But then, there would be some that showed GREAT - the paint is shiny, the interior is spotless, it maybe even has an extended warranty.  Now…all things being equal…which one will you choose?  The answer is obvious.

A home hitting the market is no different.  With folks now having more options than ever before, they are demanding to be WOWed.  Does this mean you have to coat the home in granite and the finest furnishings in order to sell?  No, but the home has to be ready to compete.  Not only will this ensure you’re walking away with the most amount of money in your pocket, but it increases the odds of selling multiple times over.

That being said, how do the properties I represent sell at 98.6% of the list price?

1. Heavy internet exposure.  87% of buyers are finding their homes online.  I owe it to my sellers to be everywhere a buyer is looking.
2. Decorator/ stager on staff.  Allows me to list a home shown in the best possible condition and outshine the competition.
3. Interactive 800#s.   A voice interactive system that links to all of my listings allowing buyers to learn about a home in a non-intimidating way, with the option to schedule a tour immediately.
4. Handyman & landscaping service.   Who wants to go through all of the prep work of getting a home ready to sell?  I make the process a breeze.  I bring in the appropriate folks to take care of any issues and make the curb appeal top notch.
5. Virtual Tours on ALL listings.  The days of one exterior photo are gone!  Internet buyers want to see LOTS of photos…from the comfort of their robes!
6. Realtor.com Featured Agent.  With millions of hits, Realtor.com is a first stop for many buyers.  I secure a stop to make sure my listings are front and center.
7. Homes.com Featured Agent.  Also a site that receives tremendous hits.  My listings hit their site immediately.
8. Rigorous coaching.  I employed one of the top real estate coaches in the country last September.  He keeps me accountable to my goals and makes sure I hit the numbers that I pledge to my clients. 
9. List Price Vs. Sales Price.   I have become an expert in pricing- a critical skill in this economy. This not only keeps my list-to-sell ratio at 98%, it’s lowered my Days on Market to 36.
10. Running my business like a business.  I’m not a part-time agent, I am in the market every day and I am constantly tracking the trends.  I want to know a trend months before my competition, keeping my sellers in front row.

My thanks to Justin for sharing his thoughts.  If you’d like to learn more, visit Justin’s website and follow his blog!