Monday, June 29, 2009
So many things in life can be related to farming. Even as an amateur gardener, I see patterns in my garden that imitate other seemingly unrelated facets of life.
One of the most valued plants in our garden is the peach tree. My wife loves peaches and makes it a priority to tend to this tree. I believe that the real estate investment business is like this peach tree. The only difference is that instead of peaches, the fruit is money. For this reason I would like to share the analogy of the money tree.
The fruit of the money tree represents profit. The weather and soil that the money tree lives in is the economy. The leaves of the money tree represent property. They are where revenue is synthesized from the life giving nutrients of market exposure, people, and tenable property. The branches represent the direction of investment whether it be in high end homes, or low-income housing, or any niche or segment in between. The trunk represents business infrastructure and the day to day mechanics of operating a business. Finally, the roots represent equity in the real estate investment business. Over time the leaves feed the roots and the roots grow. In turn, the roots feed the leaves and allow them to flourish. A healthy tree has a good balance between branches, leaves, and roots.
In the real estate investment business, many of us are growing money trees. We work and toil now so that our tree will bear fruit. Over time, and with proper care, the harvest will be easier and allow for enjoyment in life's other pleasures. Some of us inherited money trees from our progenitors(i.e. Donald Trump), some of us started from seed (i.e. me).
Regardless of origin, all money trees require the same care and consideration in order to bear fruit. Lets review the basic needs of a money tree:
1. Regular Pruning - the market place is always evolving. Housing needs and their accompanying market niches vary as demographics change and the local economy ebbs and flows. Likewise, branches on a tree sometimes die. Without pruning these unprofitable branches, the tree becomes burdened and less healthy. The roots are unable to grow as quickly as they could without the dead branch.
2. Regular Water - the economy has seasons. Water is the TLC that keeps the money tree alive and operating. In some locations, the economy is so robust as not to require much effort to make business profitable. In this case, water is plentiful for the tree and requires little attention in this regard of its owner. However, in most places, and particularly with smaller money trees with small roots, regular attention and TLC is required.
3. Pest Control - inefficiency can occur in any business. Pest control is a big part of keeping a money tree healthy. Some parasites will burrow into the trunk and waste resources on needless trinkets and administrative things. Through neglect, some bugs attach themselves to the leaves and make it harder to generate a revenue for the money tree. Fighting off pests is a constant problem regardless of how old the money tree is. Sometimes, the larger the tree, the more pervasive and harder to treat bug problem becomes.
During this growing season, begin to think of your business like a money tree. What does your money tree need? What would make it healthier? How can you help it grow?
My professional job as a Realtor is to help people grow their money trees and prune them when necessary. I have my Miracle Grow and pruners in hand. Let me know how I can help.
Wednesday, June 24, 2009
Lets take a look:
This first chart shows appreciation rates along the Wasatch Front. Data here comes from OFHEO (now FHFA) with Q1 2009 being the most recently reported statistics. What this chart shows you is DIRECTION of price, not price itself. This chart shows that after price increases for over 8 years on a row, we have given a little back.
How much have we given back? Lets take a look:
This composite chart shows you price movement. This is what most people are interested in seeing. As you can tell from our graph, prices have given up just a small fraction of thier maximum value that peaked in 2007. Keep in mind that this is an index for all properties, distressed (wholesale) and everyone else (retail).
This chart demonstrates that buying and holding is always a winning strategy in the long term in Utah. The last time we saw price depreciation was in 2000. If you bought at the peak in 1999, you would have had to wait till 2002 to break even again. So, if you are in the real estate game to win, which I am, then you need to follow this chart below.
This chart shows the Utah market cycle in general. We are on our way from phase 2 to phase 3. Wholesale prices (composed of REO, Short sale, and other distressed proprety) are in the red. Retail prices (everyone else) is in the black. We will likely see a troughing of wholesale prices sometime in 2010. Meanwhile, composite prices (retail and wholesale mixed together) have only softened slightly as scene in the above charts. It might be reasonable to suggest that the decrease in composite prices is due to the wholesale component declining rather than all of retail prices declining. You make money in the marketplace differently depending on which phase you are in. Fortunately, phase 3 is where the easiest and safest money can be made.
I hope this information helps you understand the marketplace. You can make money in any part of the cycle, you just need to know WHAT to do. If you want to know what that is, give me a call and I will show you.
That was a heartbreaking experience for me. I had to clean up my tenants filth and I knew that better tenant screening would have saved me the money and the hassle. The whole experience cost me about $3,000 in damages. Not fun.
Part of my problem was trying to recover the damages. The tenants balked when I told them they needed to pay for the carpet. They grabbed any excuse they could (all very poor ones) to try to avoid payment. My concern as a landlord was the learning curve involved with taking a tenant to collections. I had never had a damage dispute with a tenant nor had a reason to have one before this.
Fortunately, one of my property management friends suggested I contact North American Recovery Services in Salt Lake City. As a collections agency, they do all the work in hunting down and getting funds from deadbeat tenants. They don't charge you unless they collect. If the collection is pre-judgement then the rate is about 30%. If the collection goes to court (which you don't have to personally appear at) then their rate goes to 50%. Either way, its been a valuable stress-relieveing tool in my landlord tool belt.
As of today when I called to get an update, they had recieved a judgement from a court and also recieved approval for thier garnishment to start in the fall. I know I will be paid and I know when. Beautiful. Justice is served.
If you have trouble with a tenant damaging property or skipping on rent contact North American Recovery at 801-364-0777.
Friday, June 19, 2009
Author Alex Weisman has written a book about how important we are to our surroundings and describes the results of our absence.
Want to see what happens to your house after 500 years? Click on the picture below for an animated version:
The shot is brief but did you notice that after 300 years the ceramic tile is still intact!
Wednesday, June 17, 2009
Here is our first chart:
Rather than be a prophet of doom, I'll speak euphemistically and just say that this chart describes "softer than usual" sales.
This phenomenon can almost exclusively be attributed to banks requiring 30% down payment on investment property. Not to mention the blood typing and pedigree charts they require to get a loan through underwriting these days.
Here is another very interesting chart:
This chart shows what kind of financing is getting multi-unit transactions done. As you can see, conventional financing is cliffdiving. However, cash sales are the highest they have been since the last market trough in 2002. FHA Sales are robust. And most interestingly, as if awoken from hibernation, seller financing now accounts for 20% of the market. That is a huge increase from just 2% in 2007.
There are indications that the bank's tight lending criteria may last several more years as we deal with high unemployment and recession. If that is the case, look for these other forms of financing to increase their share of the market.
If you want to learn more about how seller financing works, give me a call and I will walk you through it. Its heavy on details, but, when done right, it makes for a win-win situation for all involved. I have many happy clients who have used this tool to make things happen.
Tuesday, June 16, 2009
I informed them that I didn't have any place that they would qualify for but another landlord may have a property for them. Then came their punchline: "Oh, and I must have a place for my two big dogs. I won't get rid of them just because I have to move, you know."
Whatever happened to adapting to survive?
This is a crazy example but we all need to keep in mind what we bring to the table when we negotiate a housing transaction (or anything else for that matter). If we have a weak hand, we need to recognize that and accept the market's terms. Otherwise, we need to spend some time strengthening our hand. An entitlement attitude certainly won't carry us very far.
Monday, June 15, 2009
One of the topics David speaks about is the number of traditional households in the U.S. (i.e. mom and dad married with children) has held steady since 1960. Traditional households now only account for only 25% of all U.S households as compared to 40 years ago when they were the majority. He discusses this impact on the way people use housing.
He also describes the global problem of an aging baby boomer population with money to lend and the lack of young people to work and pay interest on loans that support those boomers. He foresees dramatic lifestyle changes ahead for all of us as this imbalance in demographics continues.
It will be interesting to see how these things affect Utah's housing market down the road since it has a demographic more reminiscent of 1950's America. On a macro scale, the financial implications (interest rate volatility, lending guidelines, inflation, ect.) will affect Utah, the difference however will be Utah's unique economic profile. Utah will be subject to macro-economic effects that are unrelated to its own local economy.
In a way, we are living through that right now in relation to the housing meltdown. Utah missed the big bubble. Yet we are paying the price via tight lending. More to come....
Thursday, June 11, 2009
Although this is not a political blog, there are a few issues economically speaking that are becoming political in nature. Currently, government's hand in private sector business is growing. The ultimate effects of this will be inefficiency on a broad scale.
The reason I mention this is because more evidence of this government hand showed up in Freddie Mac's appraisal guidelines recently. You can read their new Home Valuation Code of Conduct here. This code applies to all financing EXCEPT FHA/VA, Native American Loans, and 502 Rural Loan. Those exceptions are already government sponsored and heavily regulated. These guidelines can be seen as cutting conventional lending down to FHA/VA restrictive standards.
The new requirements are significant. One provision is to essentially prevent contact between loan officers and appraisers. This barrier impedes business and prevents professionals from problem solving. Often, material information that will help an appraiser in his assessment of property is had by loan officers and realtors. This window of communication is now closed so appraisers must make "best guesses" based on hard market data. What this translates into is fewer appraisals satisfying the needs of the loan conditions and therefore less business being transacted.
One may suggest this is reaction to fraud and abuse that was found in the appraisal arena. Or, it might be just another sign of government's growing hand of control over our economic system and our ultimate dependence on that hand for subsistence. My guess is it's likely both.
Shawn Watkins called me this afternoon to tell me about an appraisal he just got back today on one of his investment properties. He was doing a refi and the lender was connected with the next appraiser in queue in "the rotation". Here is the break down on Shawn's property:
1. It has a current CMA of about $105K.
2. Shawn paid $77k for it as a short sale 18 months ago.
3. Shawn spent $17K in rehab and upgrades.
So what did this appraiser do? He used three BANK OWNED comparables (WHOA!?) to establish value for the property. There were plenty of other non-distressed homes available to look at. For some reason, this appraiser chose to grab his comps from the slimy bottom of the trough. His opinion of value? $70,000!
This appraiser is from out of the area. This rediculous HVCC rule just cost Shawn $450 and will cost him another $450 to play Apprasier Roulette again so he get his loan done . Lets keep our fingers crossed.
Tuesday, June 9, 2009
To many people, being a landlord seems daunting. Of all the factors that deter people from investing in real estate, tenants, or the obligation to work with them, is the largest.
I hear people tell me all the time "I just don't want to deal with tenants" or "I had a really bad experience once, I just don't like tenants".
Its important to understand that landlording is part art but mostly science. Its definitely not something that you do shooting from the hip. That type of behavior will hasten your exit from the real estate business. So, lets take a look at the fundamentals of landlording and see if we can lay a solid foundation for everyone.
There are three things you are concerned about as a landlord:
1. Timely payments of rent
2. Preservation of the condition of your asset
3. Neighborly behavior of your tenant
The application is the means we use to determine the likelihood that these three things will happen. By taking an application AND verifying the information on it, you will eliminate most of your problems up front and be on your way to running a successful business.
The next question is: How do you know your tenant fits these three criteria?
Disclamer: What I am about to share is how my business model works. Depending on your model (i.e. slumlord model, resort property model, absentee owner model) you will handle things a bit differently.
First, you will have your tenant fill out the application. The Utah Apartment Association is an excellent resource for landlord documents. You will find out if your tenant has a job. If he does, how long has he been there? Does he bounce around from job to job? What does he do between jobs? Is his income steady? You want steady income from rents so income needs to be steady for your tenant. If not, a higher deposit is in order to compensate for the risk. Also, how much does your tenant make? Is it twice as much as rent? If so, beware. How will he pay rent if his car breaks down? How will he pay rent if he has to pay a speeding ticket? The safety zone for income-to-rent is usually three times rent. In a few of my rentals I require income to be four times rent. Again, if the tenant doesn't fit in this mold, I increase the deposit to compensate for the risk.
Note: Per Fair Housing law, you cannot discriminate WHERE income comes from. For instance, if your tenant is on disability income or receives all their rent from a church, you cannot discriminate against them for that. However, you can screen them for not making enough money based on your written renting criteria. That is a legitimate reason to decline an application. Just be sure you apply the rules equally to everyone who is applying. If you are "playing favorites" with applications, you run a serious risk of getting fined for violating the law.
Looking at your clients credit report is going to tell you a lot about your tenants track record paying his obligations. Is he late on his car payment? Did he stiff his last landlord? Or the one before that? It will show up on his report.
Now lets talk about protecting our asset. The first thing I do is make sure my tenants pass the smell test. If I can smell them (i.e. body odor, cat urine, smoke, alcohol, ect.) its an instant DQ. If they smell like that, what do you think their living environment smells like? Bad smells translate into repainting and re-carpeting when a tenant leaves. That mean you will spend a lot of money fixing the problem. Of course, most folks who don't take good care of thier hygiene typically don't take good care of thier credit either. There is a tight correlation there.
Pets are a touchy subject. You need to read Perils of Landlording: Canine Catastrophes to see how destructive pets are. I no longer allow dogs in any of my properties. I am 1 for 2 on dogs. I have had two trashed houses. Thats two too many. If you want to guarantee a property returned in good shape, avoid pets in general.
Smoking is another interesting and sometimes sensitive subject. Many tenants smoke. The risk associated with smokers is when they smoke inside or chain smoke. If they smoke inside, plan on stainblocking, re-painting, and re-carpeting when they leave. Smoke will ruin a house the same way that a house fire causes "smoke damage". For this reason, I am trending away from renting to smokers. They also happen to be higher risk for late rent as well. Smoking represses the immune system and so smokers are sick more often and therefore work less and earn less. Since they are tired most of the time, they usually do not do normal cleanup around the property. I have had a couple exceptions to this but not many.
Finally, its important, especially in larger complexes and in multi-unit situations, that your tenants behave neighborly. I had two tenants in one of my buildings who were at each others throat all the time. They both suffered from maturity issues and they each called me constantly to tattle on the other. It was a big headache. Unfortunately, there wasn't any one specific thing on the application or my conversations with them that would have clued me in to this type of behavior.
MAKING SURE GOOD THINGS HAPPEN
You need to be compensated for taking risks with tenants. Tenants need to compensate you for taking a risk on them. How does a tenant compensate you? They give you collateral.
If they have good credit, that credit and a small deposit is offered to compensate you in case of damages. If they trash your home, you trash their credit via a judgement and collections. A trashed credit report makes life much more expensive for that tenant in the future, plus you can collect from them via the courts if they have a job.
If they have bad credit to start with, a large deposit stands by their name. If they trash your home you keep their deposit. Most tenants I know want their deposit back so it acts as a huge incentive to behave well while in the property. So far, yet unfortunately, I have only had to keep one tenant's entire deposit.
Hopefully this is a good refresher for some of you and a good start for others. Practice makes perfect. Keep the three criteria in mind and balance risk with appropriate deposits and you will headed down the right path.
Friday, June 5, 2009
Just more pressure on the unnaturally large population of Realtors out there trying to make ends meet.
Trendline volume is back to 2002-2003 levels. The market is over-correcting at this point.
An interesting point is that, for a while, tightened lending guidelines created pent up demand as people who wanted homes were forced instead to rent. That pent up demand is now eroding somewhat as jobs are lost and people who were forced to rent are now forced into their parent's basement.
Monday, June 1, 2009
My Dear Friends,
I am writing to you because I think you will, at the very least, find value in what I have written. I hope you don't mind that I have chosen you to send this to. This is not a forward that I received, but something I have written that I hope, after you have read, you will forward on to others. You should know before reading this that I love our country and am very grateful to be an American. I believe so much in the liberties and principles that stirred, not only our founding fathers & mothers to sacrifice their lives to create such a land of liberty and potential, but all those since their time who have given of themselves to make America even better than the way they found it. It is this same love of liberty and belief in our ability to make tomorrow better that stirs me to send to you these thoughts. Those who know me best know that I believe in all people - including politicians. I worry however of the future of America and hope that what I have written below regarding health care reform will awaken within you some of that rational concern regarding the path America is on. Health care reform is a very important topic and a matter that will materialize into legislation this year. What I have written is not a slam on any party or person. It isn't a slam at all. It is an alarm - an alarm that people of all parties and opinions should consider.
Thank you for your friendship to me - however or whenever it was rendered.
What is the Future?
I attended a webinar this past week called "Health Reform 2009: Watershed or Waterloo?" It was put on by my broker and after sitting through it, my heart was broken. As a result, I was moved to a state of heightened concern and anxiety for the welfare of my nation. I will share why.
There are a few laws that simply cannot be argued with.
1. You need money to buy things
2. Money has to come from somewhere
3. There isn't an infinite amount of valuable money (See footnote 10)
Knowing how our Congress & President are in a hurry to pass major health care reform because of this new "Crisis," it seems that "reform" is inevitable. For some time now they have been selling the country this line:
1. Millions of poor & uninsured
2. Increasing costs
3. The government will give us the same health care that the President has
They use these three things as a premise to give them authority to step in and reform our system (See footnote 1). The word "reform" itself implies that the system has been in some criminal state and needs to be brought in line with higher norms and standards. I will admit that there are certainly some problems with health care - every American can. But, there are many pricing problems in America (I think the iPhone is too expensive for example. Everything Apple is too expensive for that matter) and we do not want or hope that the government will get involved. It isn't their role - they have no authority, implied or explicit, for price controls.
Here are the facts:
1. Millions of Poor & Uninsured
Of the 46 million uninsured Americans (15%) total (2007 numbers),
• 12 million eligible but not enrolled in Medicaid or SCHIP. < • 8.5 million have household incomes over $50,000. •â€¢ 9 million have household incomes over $75,000. • 9.7 million nnon-citizens (including 6 million undocumented aliens). • 8 milllion college-aged young adults (4.7 million are students). (See footnote 2) So, those that we should really be worried about are not those who are eligible but who choose not to enroll, those who make over $75,000 annually but choose not to purchase, or the undocumented aliens (I want them to have insurance but a government entitlement should be available only for legal residents within that government's jurisdiction). Those we should worry about are the 8 million poor college students and the 8.5 million with an income above $50,000 and below $75,000. 16.5 million is a lot less than 46.5 million. Half of these could be fixed by a federal mandate requiring parents to keep their children on their health insurance while in college or up to a certain age. The other half could be addressed by changing the requirements for medicaid. Woo-la. As far as access goes, health care is reformed. 2. Increasing Costs
Regarding rising costs, the facts are what they are. Costs are going up (See footnote 3).
3. The government Will Give us the Same Health Care That the President Has
The insurance that the government will offer Americans is not the same plan that they have. Certainly that was one of the parts of Senator Obama's message while running for president (See footnote 1). However, that was his plan. Congress will formulate their plan and that is the one that we will have to deal with. The main thrust on capital hill is not to give us the same plan as the President and Congress have but it is to create a National Health Plan - Universal coverage - and eventually a single payer system.
I know that sounds nice (in fact, it sounds really nice) but it isn't. As the benefits manager within a worldwide organization, I can tell you from experience that OUR health care system is the envy of the world (and the world does include Canada & Europe). People are legitimately sad to see our country taking the direction it is with health care. They know that it will downgrade the quality of care - not improve it (See footnote 4). The fact of the matter is that it will eventually downgrade care and create a rationing of care system. It is a fact. I will explain in a moment why.
For these downgrades, the President gave an estimate of $1.6 trillion dollars. I guess only with government will we pay more for less. If this were an accurate forecast of the expected cost, it would perhaps be the first time in government history that it were. Things always cost more - always - than what our elected officials tell us.
For example, here is the Massachusetts experience (See footnote 5):
Budgeted $460 million for 2007
Forced to budget $870 million for 2009
Medicare Projections (See footnote 5):
$3 billion/yr in 1965, est. $12 billion by 1990
Actual 1990 cost: $107 billion
Actual 2008 cost: $430 billion
The Iraq War:
Forecasted at $50 Billion, it could top $2 Trillion (See footnote 6)
Here are some more figures:
This year's National Debt: $1.8 Trillion
National Debt: Officially more than $11 Trillion. That is a whopping 13% of GDP (Economists say a nation can sustain about 3%. Annually alone, ours is at 4% - see footnote 7)
Medicare: Has not balanced its budget in more than 20 years…currently has a $38 triillion unfunded liability. Medicare has stated it will go bankrupt by 2017. Some projections are as high as $68 Trillion in unfunded liabilities. (See footnote 8)
- $96 billion negative cash flow by 2020
- $280 billion negative cash flow by 2025
- $500 billion negative cash flow by 2030
If the President's projection is twice as accurate as Medicareâ€™s projection, and only misses the mark by a factor of 5… The $1.6 trillion becomes $8 trillion over 10 yearss…60% as large as our current national debt.
Where will it all come from? We go back to our rules:
1. You need money to buy things
2. Money has to come from somewhere
3. There isn't an infinite amount of valuable money (see footnote 10)
The simple truth is we are heading into a future of total financial destruction. That is the direction this road we are on is heading. There isn't some magical pot of gold at the end of this storm - because there is no rainbow.
You can see that this plan for health care reform reveals that much moregovernment reform is needed before we can even begin to allow the government to reform health care.
And, after Congress' mad rush to pass this "critical" legislation for all 9 million people who need it, we will be forced, just a few years from now, to make cuts & to ration care for the whole nation. Why? Because of those rules. President Obama says that health care costs are the biggest threat to the long term financial security of the nation (See footnote 9). I say that health care reform is the biggest threat the financial security of the nation. You can't have everything you want with a fixed amount of resources and the government will be in a much sadder, much worse state than it is now. Someone with no credit and no money can't buy a thing. A whole nation with no credit and almost no money won't be able to either. This doesn't take into consideration the rampant inflation forecasted as a result of our bailouts either... We can have press releases and great speeches about the nirvana of health care reform, but, simply put, the numbers don't add up. When you add trillions of negatives to trillions of negatives to even more trillions of negatives, you get tens of trillions of negatives. When we finally are brought to account for that, no clever Enron financial reporting will be able to hide the black hole we have created. That press conference will be a terrible day.
Seeing these numbers and knowing what it certainly spells out for our future makes me almost cry out, "Who is doing this to us?! Can't they see that this is only going to leave all Americans stranded down the road? Can't they see that this is going to literally destroy the country we love?!"
This is so irresponsible. This is reckless. This kind of rash and foolish fiscal policy will lead to a true crisis & oppression of the greatest kind.
This should cause anxiety in every freedom loving American. I hope my cries become your cries as well - and that together, we can keep this catastrophe from occurring.
What is the future? On our present road it is to complete financial insolvency. Is there any other future than one of ruin? Not on this road.
How I love you America! What have your caretakers done to you?
Please Click Here to Write Your Representatives to Get us on a Better Road
1. You can hear Senator Obama discussing these issues in the town hall presidential debate last year here:http://www.youtube.com/watch?v=-f2_p-fd2D4.
2. These figures can be found from the Federal Government athttp://www.census.gov/prod/2008pubs/p60-235.pdf
3. You can read more of this here: http://www.nchc.org/facts/cost.shtml at the National Coalition on Health Care.
4. Besides my own personal interactions with my colleagues in Canada and Europe, here is a great clip of several interviews worth watching:http://www.youtube.com/watch?v=BbHh86HkBhk.
5. Health Reform 2009: Watershed or Waterloo? A Lockton Benefit Group Webcast
7. To see a graphically our national debt, click here: http://www.cnbc.com/id/30108264/?slide=12. To learn more about the amount of deficit we can sustain, listen to the podcast here:http://dateline.radioamerica.org/archives/1879
10. The government can certainly print up a near infinite amount of money, but there is a point beyond which the money does not have any more value. There is not an infinite supply of money with value.
I think Ken's comments are outstanding. This message is so important. Unfortunately, I share this pessimistic view of our fiscal future. Readers might be interesting in The Coming Generational Storm for anther perspective related to the realities of the demographic time bomb that has just started to go off. Be prepared for what is to come.