Are We Seeing The Bottom of the Real Estate Market?

For those that love studying statistical analysis information to make informed decisions, you will find these graphs interesting for sure. The million dollar questions for everyone “Has Decline in Home Values Bottomed Out” Who knows for sure, but this much is true “Home Affordability is the Best its Every Been” Mortgage rates play a big factor in the home affordability index. And history shows finding the true bottom of anything is very difficult. It’s always easy to look at the historical data and see the bottom. Back in 2008 the Dow was just over 6,000 and everyone was negative about buying into the markets and now the Dow is close to hitting 13,000

In this graph we can see that the Home Buyer Tax Credit prevented the housing market correction from taking place by 16 months. I suspect that we’re basically at “the bottom” for home prices, give or take five percent—barring a complete economic collapse, of course (which I realize some of my readers still strongly believe is on the horizon).

Prices in the Seattle area may dip a bit more, but I’ve yet to see any compelling evidence that they’ll lose another twenty or even ten percent. Affordability is already through the roof, and interest rates are likely to be held artificially low for quite some time to come. Buyers are coming back, and supply is taking a beating. Put it all together and you’ve got a picture of a market that’s bottoming out.

This projection was not even close when the prediction was made.

The Inventory-Based forecast fell apart pretty thoroughly just after it was forecasted. According to this model, we “should” be at +5.6% compared to a year ago, but in reality we’re at -6.3%

Whoops. Fail here too. Prices more or less followed the trend line down, but blasted right through 30% off peak and recently passed 40% off peak.

The Affordability forecast is interesting, in that home prices haven’t fallen as far or as fast as the forecast, but affordability is way higher than the forecast, thanks to the sustained plunge in interest rates. When this model was made, rates were around five percent, and the forecast was based on them staying there, not dropping to less than four percent.

Rents hit an all-time high in October, and appear to be headed up again after stagnating between 2009 and 2011. If rents rise another 4% and home prices fell another 4% an entirely plausible scenario over the next year the two lines will line back up again for the first time in fifteen years. And that does not even take inflation into the picture when it comes to future rent increases vs. having your mortgage payment fixed for 30 yrs. Excluding taxes & insurance.

Contributing information for this blog posting

Safe Real Estate Investment Strategies - 5 Critical Elements

Most people looking for a real estate investment strategy are seeking two key things (besides a solid rate of return) when they approach the idea of investing in cash producing real estate. They want simplicity and they want safety.

It is very rare that I meet with somebody who wants to be actively involved in property management, and nobody wants to put their hard earned savings at risk. With these two points in mind, I will explain a real estate investment strategy designed for strong rates of return while remaining both simple and safe.

Before we identify and explore the 5 critical elements of a simple and safe real estate investment strategy, it is important to understand how a long term plan of “buy and hold” is the safest and smartest way for the typical investor to grow wealth.

Safe Real Estate Investment Strategies - 5 Critical Elements

I believe there are 5 critical elements of a simple and safe real estate investment strategy and if observed, new property owners will have a long and successful experience that will provide better returns than what most people can find in other investment opportunities. These five elements are:
1. Establish A Goal (Rate Of Return)
2. Assemble A Team
3. Understand The Numbers
4. Choose Targeted Location
5. Choose Boring Properties (yep, not a typo)

Your Real Estate Investment Strategy Requires A Goal
When I meet with most “wanna be” investors for the first time, I ask them to tell me their desired rate of return, or return on investment (ROI). Hardly without fail, the answer I get is “as much as possible,” but this is not a very well thought-out response.

If you are going to be investing in real estate, then it is safe to assume that you will be removing your money from an existing investment in order to facilitate this new venture. I believe real estate investing requires a higher level of involvement than do most other investments, so I believe the investor should demand a higher rate of return in real estate than he or she could get elsewhere (mutual funds, bonds, stocks, etc.)

An ROI goal should consider all other opportunities the investor has, and it should be realistic and rewarding. Don’t just pluck a number out of a hat, set a target that once achieved, will confirm that your real estate investment strategy beat all other valid investment opportunities.

Key Players Required For Successful Real Estate Investment Strategy
As with all things in life, unless you are a subject matter expert, you will eventually have to put your trust in people. In order to minimize your exposure within your real estate investment strategy, I strongly recommend assembling a team of people that you will turn to for advice, service, and assistance. At a minimum, this team should include:

• Real Estate Agent – Your real estate agent should be your investment counselor and assist you in finding the right properties for your portfolio. Work with somebody who has numerous real estate investments and who can demonstrate a solid grasp of the numbers. Most agents are not qualified to help you, but everyone will try. If you want long-term success, make sure you pick the right agent.
• Property Manager – A property manager is going to be the person who will safeguard your investment and help you squeeze the return from your investment. The process of choosing a property manager should not be made lightly. Most likely, your real estate agent will know a very good property manager in the area. I would recommend you interview some recommended managers and pick the one that you think will give you and your properties adequate attention.
• Real Estate Attorney – If you own property long enough, you will be faced with situations that require legal assistance. It is far wiser to have somebody in mind to handle these issues before you face them. Ask your property manager and real estate agent for recommendations for a highly skilled real estate attorney. Do not make the mistake of using an attorney who does not specialize in real estate, as it will cost you greatly.
• Mortgage Lender (Loan Originator) – In order to maintain the highest possible ROI, you most likely will be using leverage in your real estate investment strategy. Therefore, ensuring that you get the best mortgage interest terms when you borrow money for your real estate acquisition is important enough that you should hand select the mortgage lender that you will use when you buy each investment. Again, turn to your real estate agent for recommendations on the best mortgage originator with whom to work.
• Accountant (with strong real estate background) – It’s not about making money, it’s about keeping it! Most accountants have specializations; make sure the one you work with can demonstrate that she or he knows a lot about real estate. Reducing taxes helps increase your ROI, so a skilled accountant is an important player that will help you execute your real estate investment strategy.

You Must Understand The Basic Numbers
We have worksheets for crunching the numbers when looking at any property, so Just know that there are safeguards that you can establish to ensure that you do not take any unwarranted risks. While nothing in life is guaranteed, there are some smart decisions that you can make regarding “the numbers” that will ensure that your real estate investment strategy is safe.

In the example below, I have shown that a $21,600 investment will yield an annualized return exceeding 16% if the investor will hold the property until the property sell strategy (explained below) is attainable.

Purchase Price $90,000
Closing Costs $3,600
Down Payment $18,000
Total Acquisition $21,600
Loan Amount $72,000
Monthly Rent $825
Cost Value $153,000

The sell strategy in a long-term real estate investment requires one to have a specific target in mind before an acquisition is made. My recommendation for investors today is to key in on what it would cost to replace a piece of property once the market resumes growth. Due to the glut of homes on the market today, one can buy a home at a significant discount to cost today, lease the property for a respectable cash flow during the hold cycle, and then sell the property once “cost” is a factor in the market again.

The table below shows the anticipated ROI for this example for hold times of 5 through 17 years. I doubt we will see cost return to the market in less than 5 years, and I suspect 17 is very, very conservative.

An investor who purchases the example above would expect an annualized ROI (Return on Investment) of 18%. Considering all that is going on in the world, I suspect most people would be excited about 18% today!

The example above was just “plucked” from the “what is available” list of homes for sale in Tacoma, WA. This investment also does not take into account the ability to leverage your investment even better with some of the buying strategies we have in buying foreclosure properties and the ability to refinance the property and return to you most if not all of your down payment money, which turbo charges the ROI way beyond the above figures. Read my previous post on “buying Foreclosure Properties” Another aspect to turbo charge your investment is factoring inflation into the future ROI. Feel free to contact me to learn more.

Targeting Your Desired Area Of Operations
Much of the real estate investment marketing on the internet promotes buying properties “where the best returns can be found.” If you are a large, institutional investor with a solid staff, this might be the best solution for you. But if you are a small investor with less than $5M in real estate holdings, I would urge you to establish an area of operations that exists close to where you live (or spend a lot of your time).

Some of the most obvious signs of opportunity can be found in your everyday life, and living in your investment area will make you an informed investor. Think about how little you know about some of the companies that you’ve invested in the stock market, and yet you are practically an “insider” when it comes to what is going on in your local community. You have opinions and thoughts about different parts of town and different neighborhoods, so use this to your advantage and only buy your properties in areas that have longevity and a very stable, predictable future.

Boring Properties Are The Secret To Successful Real Estate Investment Strategy
The fifth and final element is crucial to your success. This is so simple, yet so important. If you are excited about a property that you are acquiring and want to “show it off” to your friends, then you are most likely making a mistake. Safe real estate investment should be built on a portfolio of “ho-hum,” blue-collar, nice working class family rental properties. They should be in great condition and in areas that will likely be strong for another 50 years.

Exciting properties carry risk, boring properties do not. Boring properties stay filled with great people who help you reduce your mortgage debt while you wait for real estate market cycles to shift to a seller’s market. Buy boring, and the returns will excite you.

Home Inspections - Questions to Ask a Home Inspector

You made the offer to buy your new home and the seller accepted the offer. You have a contingency clause in the purchase & sale agreement to get a home inspection. This is extremely important and even if the home is new construction “Get a Home Inspection” Major Repairs can turn that dream home into a nightmare “money pit” Below are questions you should ask a Home Inspector before you hire them. Not all home inspectors are alike, hire a good one!

1. What does your inspection cover?
The inspector should ensure that their inspection and inspection report will meet all applicable requirements in your state if applicable and will comply with a well-recognized standard of practice and code of ethics. You should be able to request and see a copy of these items ahead of time and ask any questions you may have. If there are any areas you want to make sure are inspected, be sure to identify them upfront.

Here is a good, in-depth Home Inspection Checklist: Did Your Home Inspector Check the Essentials?

2. How long have you been practicing in the home inspection profession and how many inspections have you completed?
The inspector should be able to provide his or her history in the profession and perhaps even a few names as referrals. Newer inspectors can be very qualified, and many work with a partner or have access to more experienced inspectors to assist them in the inspection.

3. Are you specifically experienced in residential inspection?
Related experience in construction or engineering is helpful, but is no substitute for training and experience in the unique discipline of home inspection. If the inspection is for a commercial property, then this should be asked about as well.

4. Do you offer to do repairs or improvements based on the inspection?
Some inspector associations and state regulations allow the inspector to perform repair work on problems uncovered in the inspection. Other associations and regulations strictly forbid this as a conflict of interest.

5. How long will the inspection take?
The average on-site inspection time for a single inspector is two to three hours for a typical single-family house; anything significantly less may not be enough time to perform a thorough inspection. Additional inspectors may be brought in for very large properties and buildings.

6. How much will it cost?
Costs vary dramatically, depending on the region, size and age of the house, scope of services and other factors. A typical range might be $300-$500, but consider the value of the home inspection in terms of the investment being made. Cost does not necessarily reflect quality. HUD Does not regulate home inspection fees.

7. What type of inspection report do you provide and how long will it take to receive the report?
Ask to see samples and determine whether or not you can understand the inspector's reporting style and if the time parameters fulfill your needs. Most inspectors provide their full report within 24 hours of the inspection.

8. Will I be able to attend the inspection?
This is a valuable educational opportunity, and an inspector's refusal to allow this should raise a red flag. Never pass up this opportunity to see your prospective home through the eyes of an expert.

9. Do you maintain membership in a professional home inspector association?
There are many state and national associations for home inspectors. Request to see their membership ID, and perform whatever due diligence you deem appropriate.
10. Do you participate in continuing education programs to keep your expertise up to date?

One can never know it all, and the inspector's commitment to continuing education is a good measure of his or her professionalism and service to the consumer. This is especially important in cases where the home is much older or includes unique elements requiring additional or updated training.

This information provided from HUD