BloodhoundBlog

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Author: Cooksquared (page 1 of 4)

Real Estate Investor

August 13, 2012

Why Does Zillow Hate my House?

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Why Does Zillow Hate my House?

If you are a real estate geek like me, you are obsessed with real estate valuation.  It’s bad enough that I spend most of my day performing real estate valuations for numerous investments, but my passion for real estate sends me off to open houses on Sunday’s just looking.  You know it’s bad when the realtors know your name and worse when they give your that disapproving stare of disdain as you ask them for the 50th time, “how long has this home been on the market”?

To be fair, my fiancé and I are in the process of searching for a brownstone in Brooklyn.  While we probably won’t be in the market for two or three years, I like to stay on top of pricing and opportunities, so I can jump on any wayward / misinformed price.  Plus, I am a real estate nerd.  Given this, I am also considering selling my New York City condo.  It’s too small for a family, and I haven’t lived in it in three years now.  It will make an awesome pied-a-terre when I am 50, but I am not sure I want to keep paying the gap between my rental income and the very large mortgage / ever increasing condo fee.  I dread the day when the fee will be larger than my mortgage payment, but its coming.

This leads me to a very real problem.  How can I determine the true value of my home without putting it on the market?  I work in real estate private equity.  To determine the price of an asset, I can call an appraiser, three or four brokers and ask a friend what he might pay.  Averaging all those numbers gives me a good approximation of the price of my asset and best of all its free and takes about 10 mins, including idle chitchat.

But what about my home?  It has become easier to see what other people have recently sold their homes for.  Websites like Property Shark, Street Easy, etc. offer a good real estate detective past sales data of comparable property. Read more

August 3, 2012

Primary Home – Investment or Liability

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Real Estate Investor

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Pre-2007, I am not sure this topic would have even been controversial; people not only regularly utilized their home as their “primary investment”, but often, treated it as their personal piggy bank.  In hindsight we can all judge others as we secretly lick our own wounds from a vicious downturn no saw coming, but that experience left a visceral taste in many mouths.

Most experts would suggest that your primary residence is not an investment.  Why, you ask?  First, you purchase a home based on need.  Your buy and sell decisions rarely spring from analytical thinking around market timing.  Instead, most times, they are rooted in your changing life needs.  Second, investment strategy wages a secret war with your personal desires.  For example, I want a tricked out man cave equipped with a full wet bar, bathroom and other appropriate amenities.  Am I thinking about the return on my investment, or the endless joy my friends and I will have watching football on Sunday, Monday and Thursday?  Sure, I will likely increase the value of my home with these upgrades, but the anemic return on investment, if any, would never be worth the money.  Said differently, would you make the same upgrades to your rental property; probably not.

If it was that easy, I wouldn’t write the article.

I will start with a question.  Is it easier to invest in stock or buy a house?  Right now, Berkshire Hathaway Inc. (NYSE: BRK.A) trades at $128,175 per share.  Its five year performance has been strikingly similar to the performance of many real estate markets.  If you have a job making $50k and $7k in the bank, do you think you will ever in your lifetime own a share of Berkshire Hathaway A outside of a very lucky lotto ticket?  The answer is unequivocally no.  You don’t qualify for the right to buy on margin and even if you did, where would you get the 50% required to do a margin buy?  And how would you live on the prison food when the margin call comes?  All important questions to consider…

Now, let’s take that same fellow Read more

July 27, 2012

Where is the Real Estate Market Going Today???

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Real Estate Investor

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If you are like me, you have a random sampling of news websites to keep you abreast of the happenings of the world every hour or so.  It’s the age we live in; every data point, story, press release, blog post triggers a monsoon of pundits and analytical analysis that either sends you running for the hills or tripling down on your latest investment.  If you don’t believe me, scroll through this reputable blog and tell me how I should be the most confident in years on Tuesday then be disappointed in home sales twice only a week later.  With everything out there, how do you find the truth?

First, understand the underlying data.  As it relates to real estate, one needs to be especially cautious.  Data may or may not be adjusted for seasonality, it may or may not be a selection of particularly poor or particularly good markets, it may be new homes vs. existing homes, etc.  With the need for new headlines every hour, data can and will be manipulated to tell whatever story is the flavor of the moment.  Personally, I always start at one of the sources.

Second, understand the basics of real estate.  Unlike the stock market, real estate is slow moving, plodding, and a hyper-local asset class.  Despite what the headlines might say, you have not missed the bottom in many locations.  If you are looking to buy a single family home, tomorrow will be just as good a day as yesterday, as will six months from now.  Interest rates tend to move on a quarterly basis and rarely increase more than 0.25% in that time span.  Sure, your neighbor might have a 3.75% interest rate, but your 4.25% will put your payments close enough and will still be historically, the lowest in our history.

Investors will likely need to act with more urgency.  In most of the hardest hit markets, institutional investors (i.e., private / public corporations with lots of money to spend) have quietly been buying up homes at a breakneck pace.  Trying to find a bargain in Florida or Nevada is no longer a Read more

July 20, 2012

The Chupacabra, Loch Ness Monster, and the Most Rare Sighting of All; an Amazing Broker

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Real Estate Investor

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It’s been quite a while since I last wrote on Bloodhoundblog.  It certainly doesn’t mean that I have been absent; frankly, it just means I have been too busy to take 30 minutes and compose an interesting thought provoking piece of writing up to the standard we have all come to know and love on this site.

But I digress, as a real estate investor I have only worked with two great brokers in my entire investing career.  I find most run-of-the-mill brokers to be under-educated, uninspired, and more interested in cashing a check by any means necessary than actually meeting my needs.  The first broker was a dynamic “buyers” broker, who understood my investment goals and my available capital.  Rather than over promising and under delivering, she relentlessly showed me house after house for 4 weekends straight until we found the right quaint little fixer-upper in my price range.  Her reward, a $2,000 commission on a $40k home sale and my testimony.

What was my testimony worth?  I did two more deals with her, both taking much less time and for a much higher dollar value in the next year (+$10k to her bottom line).  I did another deal with her the following year for another $10k to her and I referred her like crazy to all of my investing friends.  Even if none of them bought a single thing from her, she turned a $2k commission into $20k, at no additional cost to her and very little time thanks to her investment in me and her in-depth market knowledge.

Realtor number two is basically the same story, but add a few more zeros given some career advancement and price appreciation (Detroit vs. New York City).

From a buyer’s perspective, I am looking for the following qualities:

  • Market Knowledge – I don’t need you to print off a list of 80 comps (not reviewed 90% of the time) and ask me what I think.  I need you to send me a targeted list of homes you have been inside and already know will meet 90% of my needs.  I need you to know why this Read more
October 12, 2009

Capture Appreciation and Cash Flow

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Real Estate Investor

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The advantage of investing in today’s market is the potential to capture appreciating assets that provide strong cash flow. These investments are the holy grail of real estate investing. In strong markets, these properties simply don’t exist, but in down markets, a smart investor can pick out these diamonds among the rough.

Consider the price declines in many areas of the US. Housing prices in the strongest metro areas like Los Angeles, New York, San Francisco, etc. have dropped in the double digits. But what have rents done over that same time period. Honestly, they have dropped as well, but not nearly as much. Rents did not experience the same run up in values as home prices because renting or owning is a zero sum game. As more renters decided to become owners, owners of rental units had to lower or at the very least not increase their rental rates. Rent growth slowed and owner-occupied values soared.

Now the pendulum is swinging the other way. Many buyers are returning back to the rental market by choice or by force. Rents are still experiencing some stress because of the increased inventory of rental units and shadow rental units (people renting their home or rooms because they cannot sell). Renters are moving back home with their families or doubling up. Despite these negative signs, rents should not be expected to decline at the pace or to the degree of the housing market.

This presents an interesting opportunity to buyers of small multifamily or single family homes as rentals. Areas that made no sense to buy for rentals now make sense again. Some areas in LA, San Diego, New York City, etc. should be re-examined. Buyers in these markets have a rare opportunity to buy cash flowing properties with the prospects of double digit appreciation. Even if that appreciation doesn’t come back for five to seven years, the buyer has the luxury to wait because of the cash flow coming off the properties.

The combination of low interest rates, level rents and Read more

September 28, 2009

Investment Strategies: High Volatility Markets

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Real Estate Investor

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As I begin analyzing a variety of markets, I thought I would quickly share some tips for investment strategy consideration. In thinking about an investment strategy it is important to consider the volatility of the market you are investing in. For example, a market like Los Angeles might see double digit growth one year and negative growth the next, while a market like Chicago might see low single digit growth one year and simply lower growth the next.

When thinking about whether or not to get into a market early vs. late and when considering whether to get out early vs. late, it’s important to understand the market dynamics. Consider a market like Los Angeles. Over the past 20 years, this market has seen growth as high as 33% to as low as (25%) in one year. From 2001 to 2006, LA experienced double digit growth every year. Conversely, from 1991 to 1997, that same city experienced negative growth every year (data from Case Schiller Home Index).

In a market like this an investor is better off getting in early and getting out early. If you are a year early, you might experience one year of negative growth, but you would then be rewarded with rapid growth. Even if its not double digit growth, it will trend significantly higher than the national average. On the other hand, it also benefits those investors to get out early. Given the rapid change in markets, a double digit growth year could easily be followed up by a double digit negative growth year. Getting out early and moving to a safer market would typically be better than staying even one year too long.

Less volatile markets afford investors the opportunity to wait and see. Markets like Chicago experience much slower growth trends and decline at a much slower rate. In these markets it’s smarter to invest after the market has begun its rebound because the growth from year to year is rarely significantly different. Additionally, investors aren’t penalized by rapid negative swings Read more

September 21, 2009

Whats the Downside to Investing Today?

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Real Estate Investor

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My previous article suggesting today was the right time to start getting back to real estate investing was met with expected cynicism. Investors make money by going against the crowd, not with it, right? By the time everyone agrees that you should be getting back into real estate, you really should have been back six months earlier.

But it is important to address the very legitimate concerns of those still urging caution. The major concern was what if the market gets worse. I would answer this concern by first looking at what would need to happen for things to get worse. Inventory is already running pretty high and building has been stalled for almost a year. In order for things to get worse, even more inventory would have to hit the market, but would that really make things worse? In places like Florida and California with hundreds of thousands and homes and condos already on the market, ranging from vacant, bank owned, distressed sellers, non-distressed sellers, etc. what would a few thousand more do? In my opinion, not very much.

The economy could also get worse. Investors are demanding a stiff return on capital today under Draconian underwriting, so fire sale prices are in effect in most parts of the country. Sure, it’s currently tough to get financing and it’s expected to remain so over the next couple of years, but investors are pricing that in to their offer price. Rents are low and expected to remain so for the next year. Great, price that thinking into your offer price, every other investor has been doing that for the last six months.

Ok, so the final argument is no one would sell at those prices. The great thing about millions of homes being for sale is that someone will sell at that price; you just have to find the right property. Smart sellers are wising up to the fact that a low offer is better than foreclosure. Banks are wising up to the fact that a low Read more

September 19, 2009

Real Estate Investors: Its Time to Come Out of Hibernation

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Real Estate Investor

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Is it time to start investing in real estate again?

 

First positive sign, I am writing again.  While I write that half-jokingly, there really has not been a lot to write about for the past six months.  My previous advice was to take shelter and start researching the markets.  Well, I have done that and I hope you have too.  It’s just about time to put that great research to work.

 

Second positive sign, mortgage rates are still historically low and the media has begun to talk about a real estate recovery.  Since the news outlets are always about six months behind the real estate market, I would assume we are probably at least six months into a modest real estate recovery.  Low real estate prices and low mortgage rates create an excellent investing climate.

 

Third, mortgage rates are beginning to rise and there is substantial talk of a market recovery.  As the economy recovers, expect mortgage rates to rise.  Depending on the inflation indicators, we could see mortgage rates rise rapidly or we could see a gradual increase interest rates if it remains tame.  Regardless, no one expects rates to get substantially lower, so if you can qualify for a mortgage (and that could be a big IF), it might be time to buy.

 

Expect more from me as I see a general market recovery.  As one of the few real estate investors on this blog, I like to consider myself a slightly more objective analyst of the real estate market, as oppose to the perma-bull Jeff Brown.  Agents should start contacting their investor clients now and investors should start contacting their mortgage brokers.

October 16, 2008

What Happens to the Early Worm?

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Quite a while back I asked a question, if the early bird gets the worm, what is the early worms reward for being early? In this tumultuous market we have already seem many early worms. Several months ago a lot of people began jumping back into real estate only to be crushed by the weight of numerous new market developments. But surely the worst is behind us? Think again early worms…

Real Estate is as slow as the stock market is fast. It takes time for sellers to get desperate enough to lower their price and it takes time for buyers’ incomes to rise to the level where they can afford housing prices. The income / price equation did not get out of whack overnight, so buyers and sellers should not expect it to correct itself overnight either.

The Bloodhound Blog is a very deceptive place. You are looking at some of the best real estate agents in the business here. So when they write that their business has not dropped off, it might lead the casual reader to believe that the real estate market is not in a tailspin or even that real estate is close to a bottom. Do not be lulled into a false sense of optimism. This group is adaptable, smart and most of all well above average.

Consider these national facts about the economy and then let’s draw some conclusions about the future of real estate (taken from the latest release of the Biege Book and other financial sources):

-Consumer spending is down
-Manufacturing is down and declining
-Jobless claims are up and rising
-Housing remains weak
-Housing inventory remains well above average
-Dow Jones has dropped nearly 40% over the past six months

The most significant thing on the list above has to be the decline in the stock market. This represents a decline in confidence in the global economy. This level of decline says that investors believe businesses could be in for sustained economic distress. It stands to reason that businesses in distress tighten their belts by laying off workers and Read more

September 12, 2008

Washington Mutual: The Spiral of Death

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Many people will be surprised to know that “The Spiral of Death or Death Spiral” is actually a financial term and not just reserved for the latest sci-fi film.  Ok, maybe its not approved by FASB, but most people in the industry have heard the term once or twice.  For those people who may not be familiar, “The Spiral of Death” refers to an event or series of events that triggers and inescapable decline in market value, usually leading to a change in ownership or bankruptcy.  The term is most often used in conjunction with Start Ups that issue convertible debt that can be converted to common stock at a deep discount.  As the stock price falls, the convertible debt can be converted to a great percent of ownership, until some tipping point where the debt holders own the company.

But as the title betrays, Washington Mutual is the focus here and they may be facing their own kind of “Death Spiral.”  With the recent downgrade of WAMU to Junk Bond status (Ba2), their cost of borrowing increases substantially.  This becomes very problematic for a bank because they make money by lending at high rates and borrowing at low rates.  As their cost of borrowing increases, the amount they must charge customers for loans must increase and the amount they pay for the use of customers funds must decrease.  In plain English, their lending rates have to increase and their saving/CD rates have to decrease.

Unfortunately for Washington Mutual, many of their competitors remain in the A+ credit range, putting them at a significant disadvantage.  It does not take an rocket scientist to figure out if your competitors can do exactly what you can do for a much lower cost, you should probably find another line of work.  Many investors find this obvious, making it even harder for WAMU to raise much needed capital.

The only savior for WAMU is the Federal Government’s open lending policy.  But with the government up to their eyeballs in debt (Fannie, Freddie, Bear, Lehman???), one has to wonder how long WAMU can survive?  In this not so humble writer’s opinion, Read more

October 31, 2007

Real Estate Perfect Storm Warning: Do Not Miss This Window of Opportunity

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Real Estate Investor

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One very unique thing about investing is the valuation process.  While there are numerous ways to value an investment, the only true measure is what it can be sold for.  While I can say a piece of property is worth $1 million, if it does not sell at that value it is simply not worth $1 million.

This is essentially the free market concept.  You can set your own price and your business will succeed or fail based on the number of people who think they are getting value.  Another interesting part of this equation is time.  The more time you have to wait, the more likely you are to find someone who agrees with your valuation.  However, as the saying goes, “the market can stay irrational longer than you can stay solvent.”

This is the crux of a very important issue in investor perception.  Most investors make irrational decisions quite rationally.  If I see a house that seems unreasonably valued, and then I see a similar house that is even more unreasonably value, the first house now seems like a bargain.  This cycle continues until investors either run out of money or some event scares investors back into rationality.

The problem then over corrects itself.  Investors go the other way, thinking that every house is overvalued, when it may have only been a handful.  This happens until there is an overwhelming amount of value on the table; so much value that even the most naïve investor could make money.  And the cycle begins again, and again, and again.

Small investors are always the most susceptible to these cycles because they have the least amount of information.  They have no idea where interest rates are heading or where the next hot spot is emerging.  At best they might read the Wall Street Journal or Businessweek.  The problem with this strategy is that by definition news is old.  By the time something is reported, it will already have happened.  Furthermore, by the time your neighbor mentions it to you or by the time you see a special report, the market has most certainly moved on.

This begs Read more

October 2, 2007

The Weight Loss Process and the Real Estate Market: The Same Animal in a Different Form

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Real Estate Investor

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Much like the real estate market my life has taken on significant changes over the past two months.  Fortunately, unlike the real estate market, my life has been on the upswing.  A major focus for me has been weight loss, resulting in my dropping nearly 40 pounds in about two months.  As I am not one for long personal stories, the major reason for sharing this is to relate how weight loss and real estate seem to go hand and hand.

The Realization

I am fat.  Plain and simple, one day I realized I was fat.  There were plenty of signs, quite obvious to others, which I chose to ignore: tighter pants, lower energy, the mirror, etc.  Eventually the mountain of evidence reaches a tipping point; a point at which, despite my best efforts, I simply could not ignore the fact that I was no longer the chiseled college athlete of six years ago.  For me, this point was when, on a whim that was clearly not thought out, I decided to weigh myself.  When the scale read 260 pounds and I officially weighed more than my father, it was a sad day.  The day became even sadder when my wife thoughtfully pointed out that the BMI for a person my height (6′ 2″) suggested that I should weigh 190 (thanks, dear).  

The real estate market reached this point about six months to a year ago.  Much like me, the market chose to ignore that fact that real estate prices were increasing much faster than wages.  Additionally, prices continued to increase at break neck speeds assuming the lowest interest rates in history would get even lower.  At the height of market gluttony, people were using homes as personal cash registers, spending as if the money created from nothing, would magically go on forever.  Then one day, the market hit a tipping point.  For the real estate market, my guess would be the subprime market disaster acted as this point.  At this point people begin to wake up and come to their senses.

The Action Plan

Getting back to the fundamentals of eating right and exercising brought me Read more

September 2, 2007

The “Very Best” Alternative to the National Association of Realtors

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Real Estate Investor

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There has been a lot of talk about how to fix the National Association of Realtors or even how to supplant the organization completely.  As an outsider looking in, I have one simply question:  Why are realtors paying good money to an organization that they hate?  As an investor I cannot not think of a more egregious instance of throwing good money after bad money.  I have said more than my fair share of bad things about the NAR and realtors, so I think it is my turn to be solution-oriented.

My solution is simple, instead of working from the bottom up, start top down.  If the best realtors/agents formed their own group, they would instantly dominate whatever market they chose.  Imagine, if you will, that the NAR was made up of only the top 10% of agents in the country.  These agents have a proven sales track record, impeccable ethics, and strong client feedback.  Additionally, the MLS is one of many marketing vehicles they understand and use regularly.  Simply guessing, this group would probably have quicker close rates, achieve better prices for their clients, and have a much better pulse of the direction of the market.

Such a simple idea must have many flaws, so I will start naming a few obvious ones and propose solutions that would seem to work.  Remember, I am on the outside looking in, so feel free to comment if these are way off.  First, the most obvious problem is the MLS access issue.  I think this problem actually solves itself.  Consider how large the listing database would be if the top 10% of the real estate community decided to leave the MLS and start their own listing service.  Additionally, many areas now have a public MLS or many other listing services in addition to the current NAR controlled MLS.  Finally, imagine the hit the MLS would take if the top 10% of the real estate community chose to stop listing with them?  That might open some eyes at the top.

Second, how do you get the top 10% of the real estate community to come to this Read more

August 14, 2007

Does the Real Estate Industry Need Realtors?

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Real Estate Investor

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Inspired by the glut of controversial posts appearing here lately, I thought I would add one more to the fire. In my recent browsing I stumbled upon a blog that asked a simple question, “Do we need Realtors?” That’s all. That was the whole post. While the questioned seemed relatively simple, the 1000+ (literally) comments made me think a bit harder about this question.

First, let me say that the comments came down on both sides. Many people screamed Yes and No for a variety of reasons, some valid and some simply ludicrous, but the most interesting point that came to my mind was what if someone asked do we need investment bankers? My immediate reaction would be outrage at the attack on my profession. After a bit more consideration, I would ask the more complex question, what has caused that question to be asked? What am I not doing to make my services indispensable to my client?

As an outside observer, I would like to turn this around to suggest what I need and then take a look at how well consumers view realtors meet their needs. Obviously, there will be generalizations here, so if they don’t apply to you, don’t take offense to them.

First, as a consumer I want a realtor to relentlessly try to get me the best deal possible. If I am buying a property, I would like a realtor to help me get the lowest price and if I am selling I would like the opposite. In order to assess this, I need a realtor that knows the market beyond printing out a set of comparable transactions. I would like to know the best blocks to buy and why my house should be valued differently than the house next door.

Realtors fall all over the map in this area; however, on the buyer side they really don’t cut the mustard. To start, the commission structure favors the seller. Most realtors will tout their ethics, but on more than one occasion I have heard and seen realtors take a price that was Read more

August 10, 2007

Realtors, Wake Up and Start Helping Consumers

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Real Estate Investor

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Jeff Brown’s, Real Estate Bloggers — Why Are You Blogging? What Currency Does Your Banker Accept?, has evoke a ton of comments and emotion over the past few days. As an outside observer I find it interesting during these crazy times in the real estate market, people get so worked up over SEO, but don’t seem to carry that same passion over to the market.

While I have no real interest in SEO, I thought I would mention that if (and when) the real estate market tanks, it wont matter how many people are coming to your site if they aren’t able to buy. While the point of Jeff’s article got lost after about the 20th comment, I think that it is really unfortunate. Blogging for business is fine by me, but what about the consumer? There will be a point very soon when consumers will be looking for advice on how to approach and handle a down market. It would seem like everyone’s time would be better spent having these discussions.

I am probably one of the few non-real estate agents writing/reading here, but as a current home shopper, a Realtor could really differentiate themselves by understanding the market and providing helpful advice. In a world where good content is king, I am spending my time reading and understanding where the market is going, so that I can provide readers support as things go from bad to worse.

A major knock on Realtors is the fact that they are always selling, not necessarily with their client’s best interest in mind. The National Association of Realtors makes this perception worse with every rosy real estate forecast they send out to the market in spite of overwhelmingly negative information. Interestingly, two days after I wrote this piece about the NAR forecast, the stock market had the second worse day of the year.

Looking at a variety of the real estate bloggers blogs, who have been commenting here, I have seen very little content on many sites that could really help consumers deal with this changing market. Now Read more

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