Everybody has an angle

Today’s has a picture of my house on it and an offer to pay

  • No commissions
  • We pay the closing costs
  • No repairs
  • Moving assistance if needed
  • Fast, Fair Cash Offer

Interestingly enough, today’s missive came from a real estate office, although it was not identified as such.

Nonetheless, I see two things going on here.

First, there are people out there ready to separate you from your home. There is no way an investor is going to readily give you a fair cash offer. None. They may start with one, many investors do, but by the time their contractor is done writing up their bid, you’ll have expensive bids for repairs you never knew you needed being deducted from the purchase price. Why? Because they need to make money and they’re going to make it by squeezing you. Think you’re a great negotiator? Unless you are negotiating every day in your business, the answer is probably not. The experience is just not there for you and you’re going to get your pocket picked. End of story.

I am a decent negotiator. Even I think I leave something on the table from time to time. My current favorite negotiation story involves a home that needed some repairs that were not disclosed. My client wanted $9000 in credits. That was it. Ultimately, I never actually asked for the $9000, because the seller’s agent, a few minutes into our conversation offered me a $30,000 price reduction. I positioned the $9000 so well that she gave me $30,000 without me asking for anything. Most people are not good negotiators, was there another $5000 in there to be had? Possibly but my buyers were happy.

Knowing that you would think that I would negotiate the purchase of my new car, right? Nope. I’m not used to playing in that sandbox and while I think I could have done quite well, I used a concierge who got me everything I wanted and saved me $50 a month.

The second thing going on is that these guys are giving us insight on where they think the market is going. They are doing mass mailings into neighborhoods looking for houses to buy. If they thought we were in a bubble they’d be holding cash, but they’re looking to spend their cash. These investors are bullish on the real estate market right now.

Right now there are entire neighborhoods out there where every single house is in an equity position. Every one. That is not what a bursting housing bubble looks like. Remember, a bubble is caused by a fundamental flaw in the market, something akin to an aneurysm. With every home in an equity position, that’s a healthy neighborhood. That’s not to say that something happening in another market sector can’t create the flaw in the market, just that currently none exists.

Finally what does that mean to the Bay Area housing market? For the time being, it means our market will remain vibrant. If you’ve been on a freeway in the last six months, our full employment is evident by the traffic. There is plenty of talk of a housing crisis and there is a problem with affordable housing. Some cities are making it easier for builders to add more affordable housing, or even more housing. It’s a supply and demand problem solved by more supply. Some cities are loading the builders up with fees and nonsense. They are understandably choosing the build elsewhere and that does not help the situation. I believe if we allow them to build more units regardless of the price of those units, the supply will catch up with the demand and that will be what finally puts some downward pressure on prices of homes and rents. If they want to build $1.5 million homes, fine. Eventually there will be too many of them and the homes that should be selling for $750,000 but aren’t due to demand will go back to $750,000 where they belong.

Wild card: Interest rates. Today’s buyers are spoiled rotten by 11 years of artificially low interest rates. Traditionally a great interest rate was about 6%. These buyers have shown their disdain for interest rate upticks and in response to their disdain, rates softened a bit at the end of the year. The stock market has ceased its rapid ascent but as of this writing seems to be capitulating within an expected margin showing signs of stabilization.

Wild card: Tariffs. The market reacted predictively poorly to the tariffs. They are currently on hold. It is my hope that they are never revisited. I thought they were going to be a problem and they were. The minute they were stalled the markets are responded positively and in my mind predictively.

Wild card: Government shutdown. Day 32 and it trudges on. If this starts turning into something like the Air Traffic Controller strike, we’re going to have a problem. Some key players who are working but aren’t getting paid: Coast Guard, TSA, FBI, and Border Patrol. A lot of these folks own homes and may not have the savings to hold on. If this gets past a second month, all bets are off. I have clients who are USCG, TSA and FBI. I can’t imagine the stress they are going through right now. For everyone’s sake and the sake of our economy, I hope this ends soon.

A penny for my thoughts, oh no I’ll sell them for a dollar

They’re worth so much more after I’m a goner
And maybe then you’ll hear the words I been singin’
Funny when you’re dead how people start listenin’

~The Band Perry

Last week the real estate community lost an icon.  Carole Rodoni was an economist, a real estate guru and the toughest sub five foot woman you will have ever met.  I know real estate and I’m smart, I bowed to her insight.  She was the President of Fox and Carskadon, COO of Cornish and Carey and the President of Alain Pinel Realtors.  Most Realtors were not qualified to have a conversation with this little fireball.  Whenever I asked her a question I was always mindful to not sound like this guy.

Isn’t it true….and I would be the worm.

She gave out some of the best real estate advice I’ve ever received.  She understood how the bay area worked and how the world worked.  She would start with a view of the world’s economic situation and chunk it down to the United States and then chunk it down to California and ultimately to the bay area and Contra Costa County.

I would have liked to have heard her thoughts on the tariffs.  I am deeply concerned that they are the canary in our collective coal mines.  Most go into effect starting October 1, 2018.  I’ve had business owners tell me that their cost of goods will be going up.  Spun Bicycles in Cincinnati has received notice from several providers that various bicycles are parts will be going up in cost by 25%.  I spoke to the owner of Chase Customs who told me that a roll bar that used to cost around $350 was now costing him $700.  Steel parts were already doubled in price in some situations.

Our economy is not strong enough to withstand this kind of rise in COG and I am doubtful that it can continue to grow under that pressure.

We are used to Presidents who negotiate in a certain manner.  I believe this President is a brash, bare knuckles type of negotiator and that’s what is happening right now.  He is blustering to get the Chinese to the table and the tariffs will not ultimately be in effect long, if at all.  If I am wrong, we could be in for a long cold winter.  I wish I could give Carole a penny for her thoughts on tariffs.  She will be missed.

 

Waiting on the world to change

It’s hard to beat the system
When we’re standing at a distance
So we keep waiting
Waiting on the world to change

~John Mayer

I hear it all of the time.  We’re going to wait.  Wait to buy, wait to sell, wait for the real estate world to change.  I get it.  No one wants to make a mistake with the largest financial transaction of your life.  And adulting is scary, right?

The thing is, in this world there is a cost for everything.

Just last week I took one of my cars into the shop.  The air condition wasn’t working.  It’s not my daily driver, but my daily driver has proven to be a little unreliable.  It’s brand new and has spent 11 days of it’s first year in the shop.  It needs to go in again because the seat belt chime won’t quit bleating at me.  So I took my steady Eddie into the shop to get the air conditioner looked at.  That car has an oil leak that is going to take a day’s worth of work to correct.  That’s an expensive job and I’ve been putting it off for two years now.  Well, there’s a cost for procrastination.  In my case it was a hose in the air conditioning system that rotted out because oil was dripping on it…from the oil leak I put off fixing.  The cost of procrastination for me was $400.  I might as well have dropped that $400 in the street and set it on fire, because had I fixed the oil leak when it was discovered, the air conditioning would have never failed.  The cost of waiting.

Ten years ago when I moved into my home I installed an air conditioner at my house.  I rescue dogs and always have at least one male dog here.  Apparently air conditioners are a big deal with male dogs.  Once they lift their leg on it, the unit warms up when it’s being run and their scent goes all over the neighborhood.  It’s a four legged win/win.  And it will rot out an air conditioning unit in about 8 years.  I could have built a fence around it, or hosed it off weekly and that would have saved it.  I never got around to it so I got to spend another $11,000 replacing the entire system because the old kind of freon systems have to be completely replaced.  The cost of waiting.

Now I get waiting.  I’m have it down to expert level.  It’s not always the best course of action.

Bay Area homes are expensive.  Ridiculously expensive.  Buyers want to wait to buy because they think prices are going to come down.  Sellers want to wait because they think they’re going to keep going up.  I’m going to suggest that the cost of waiting can be insurmountable.

I could tell stories about buyers who wanted to wait for the market to cool in 2013 and are now completely priced out of the market and will probably never own unless they have some windfall in their lives.  Or sellers that wanted to wait in 2006 and ended up loosing their home to foreclosure in 2009.

Hi, I’m a Procrastinator and I like buying air conditioning equipment.

I don’t.  I hate buying air conditioning equipment.  And I hate watching people make decisions that I know are not going to benefit them in the long term.  After all, with very few exceptions, people who own real estate have 36 times the average net wealth that renters have.  Thirty six times!

Part of that is that homeowners are creating equity with every house payment as opposed to making their landlord wealthy with every rent check.  I don’t know how the new tax law is going to affect the mortgage interest deduction (which you can thank me and every other dues paying Realtor member of the National Association of Realtors who fought to keep that deduction in place) and property taxes going forward, but there are still deductions available to homeowners that renters don’t get to benefit from.

OK, so what is the real cost of waiting.

Factors:

  1. Interest rate
  2. Cost of purchase
  3. Tax benefits

Current interest rates are hovering around the high 4’s.  We’re going to use 5% for this example.  And we’re going to use Bay Area prices.

The median price in the Bay Area is hovering around $900,000.  I know, that’s nuts.  There are plenty of homes in other price points in the Bay Area.  Buyer has 5% down so it’s going to be a jumbo loan with PMI.  The total amount to close this is going to be around $72,000.  The payment is going to be around $4,589.82.  Taxes are going to be around $10,000 a year and there is going to be PMI (private mortgage insurance) on the loan at around $335.00.  The house payment is going to be around $5760.  Over a period of two years, this loan will pay down to $827,990.74 adding around $22,000 to your equity.  Now you have around 7.5% equity, plus you’ve been receiving the tax benefit for two years.  What if the market goes up?  Yay!  More equity.  What if the market goes down?  Boo, your equity disappeared, but you’re still living in your own place and no one (except the City) can tell you what to do with it.  You keep paying your mortgage and the market recovers after a long arduous five year wait and the market starts running again.  Yay!  You’ve paid it down to $783,817.23 in your first five years and can probably dump the PMI.  Yay! Again!  And for those five years you’ve been writing off all of your deductions on the home.

Now let’s say you’re the seller.  You want to wait to next year because you want to squeeze every penny you can out of it.  After all this is the Bay Area and it will keep running….right?  Well maybe not.  The same guy who bought the home above could qualify for the large loan today, but interest rates returned to the historic norm which is 6%.  Now that payment is $5126.16 plus $335 PMI and $833 in taxes and that buyer just can’t afford your home any more.  Now you aren’t average and there is pressure on the market and what was $900,000 this year is barely $800,000 because they can only qualify for a $755,000 loan.  That buyer isn’t going to buy that home any more, they’re looking at a smaller home and as a seller, that seller is feeling the downward pressure on the market.

There is a cost of waiting.  Sometimes, it is appropriate.  Sometimes it’s misguided and will ultimately doom someone’s hopes and aspirations.  Don’t let that happen to you.  Find out what you can, can’t, should and should’t do right now.  Call or text 925-381-2998