Ty Brown

I will make this short and sweet, which is unusual for me, but anyone either in the market to buy or sell, or a real estate professional has an opinion on this current first time buyer tax credit. Now to debate the actual effects of the credit, good or bad, or how it is or is not market manipulation or control at some level is beyond the scope of this post, no matter how well founded or accurate they may or may not be. But like the cash for clunkers this is indeed creating a real shift in demand at least in the short term. Again the long term effect will be another matter all togeher for another time. So here are the top 3 pros and cons as I see it as a real estate professional and a property investor. And my idea to continue the plan so there is no cash for clunker type hangover period should it expire as set to do so in a matter of weeks.

Pro's:

1. Stimulates many on the fence buyers to go ahead an purchase property now rather than later

2. Helps to reduce the inventory available and in theory stabilize prices in the target price range.

3. Gives real a tangible monetary benefit to the average person, not an untangible corporation or group

Con's:

1. Limited to the typical first time home buyer target market and price range which may not address problems that created the current climate

2. Artificial inducement to act may create hangover effect in the future and creates minimum expectation standard for the future, and which may arguably be the root of the problem in the first place

3. By creating a hard deadline creates problems by rushing to act by too much of a sense of urgency to act.

My solution:

Now the numbers are arbitrary and can and should be adjusted as required for area and budget reasons. But here is a plan I think could be introduced to extend and most importantly expand the current credit.

The Ty Brown Real Estate Stimulus and Recovery Act of 2009

- $8,000 Federal Tax Credit in the first year for ANY owner occupied purchaser to be given to the buyer similar to the same current guidelines, except open to ALL buyers.

- and additional $1,000 interest credit towards federal taxes for each of the next 6 years the purchaser remains in the home.

- $2,000 incentive to purchaser to make home more energy efficient should home be in need, again similar to current guidelines -or-

-$8,000 principal reduction credit for a current seller that must sell their home that in turn purchases a new home that will lower their monthly mortgage payment by at least 20%. Then they would not be eligible for the $8,000 credit but would be eligible for the $1,000 interest credit and energy efficiency credit.

So this would be a great deal for someone that wanted to sell their home and couldnt because the value has decreased. They could lower their price by $8,000, the buyer could still use the $8,000 toward the purchase, and both could go to a new home and use the remaining credits.

The two biggest hurdles are 1. Who would fund the $8,000 principle reduction, and 2. Again is this TOO much artificial stimulus in a open market....

What is driving today's market?

The short answer is nothing really. It's like an empty car in neutral rolling down a hill. Yes it will roll, and it will go until it either runs off the road or hits something big enough to stop it. Why? How? Gravity. No not a tractor beam (Borrowed Stimulus Money) sent from the mother ship (Gov't) pulling it downhill, its gravity it has always been here.

Compare that visual to today's burgeoning recovery (the car) which is starting to roll in many areas of the country the movement can be attributed to a few things.

1. The natural cycle (The gravity) for this time of year, the spring and summer naturally bring more activity, a good amount of stored up demand. (Which is in my opinion mostly due to the unfavorable, inaccurate, over generalized media coverage of the last year.)

2. Attractive first time home buyer incentives i.e. $8,000 tax credit, record levels of inventory, lower prices and increased affordability. The big if is the supposed increasing availability of mortgage financing available. (The road with a big 90 degree turn coming up)

While these are all nice, and depending on which party's media machine you listen to, there are signs of optimism in the economy and overall direction of the housing market. There are signs of a bottoming out of the housing fall, an increased level of activity and consumer confidence in housing all over the place.

But for a true long term recovery there are a few items missing and a few time bombs (The Wall) lurking in the near future that could derail any recovery unless they are addressed; one of the most immediate being the $8,000 first time buyer tax incentive sunset of December 2009, not that this can continue indefinitely however. At some point virtually every person with the ability to purchase a home as a first time buyer is going to do so. Sure there will always be new people entering the market, but the level to drive a recovery will, has, level off and the effect will be less noticeable, they cannot drive the market for ever. Also the job market and banks starting to lend again are big deals, but those are obvious and yesterday's news.

So what do I think is needed next? (Who can jump in our empty rolling car and steer us around that corner and away from that wall?) I think a new incentive should be introduced to spur the missing link in the housing recovery, the real estate investor. Not the jacked-up-on-HGTV flipping-manic-fly-by-night-know-it-all-jack-of-all-trades-price-war-bidding over exuberant type of the early to mid 00's. But the professionals, and the rational small time investor looking to take advantage of an opportunity, and to make sound quality purchases of an asset that can never be worthless.* (As I have stated many times before, if you find a piece of property that is truly worth $0, tell me and I will buy it! Chernobyl excluded).

Tomorrow Day 3...The Investor the Missing Link

Today's Market - Tomorrow's Market Part 1

I doubt there is anyone out there than can dispute that the home buying and selling process, whether new or existing, is a vital and important aspect of any economy. The velocity of money which accompanies each transaction is enormous. With so many different beneficiaries from builders, suppliers, real estate agents, insurance agents and companies, bankers, investors, lenders, inspectors, repairmen, roofers, local, state, federal tax coffers, attorneys,, ....the list can go on for a long time I think you get the point. Each property sale creates enormous income for many, people, who in turn take that money and spend it elsewhere, who take that and spend it, who take that....
I think it is time we take a step back and look at the reality of today's market, to see what is really going on, and where it's going tomorrow. What are the few key issues that are driving today's market? Also what are the few missing pieces that are needed to bring the market back to a true recovery, or a true long term positive, sustainable healthy level?

That is what I am going to explore the next few days, and present my plan and my ideas. I would like your ideas too, so chime in as you please and I will use your input in the plan, good or bad. I will then present the final plan anyone that will listen, to see if anything happens....at worst we can look back and say we tried!

Tomorrow...What is driving today's market?

I found this old BLOG post that I had totally forgot about from my first attempt at establishing a BLOG. See how you think I fared in my predictions...is that how to spell fared?

Friday, January 13, 2006

2006 What Will This Year Hold?

I will ask you and others to tell me your opinion on what this year will hold for Real Estate in Lexington or anywhere for that matter. I will get other in the field to coment also.

My Opinion: Prices will cool off slightly, homes will be on the market a little longer than the last few years as fewer buyers are in the market thanks to media over hyping the bubble and owners will all try to sell to realize some of the gains of the past couple of years before it pops. Which equals more homes on the market and more choices for the buyers. Appreciation will return to normal and there will be more move up buyers this year as they now realize they can afford to own a home, and not as many first time buyers as interest rates will rise slightly and be volitile throughout 2006. New construction will continue to be in demand but builders will not be able to get any price they want this year as they have in the past, existing home owners will remodel to make their homes more attractive and adding pressure to new homes, this leveling prices. The growing market is retiring baby boomers who are looking for the older home, with modern ammenities, not the new homes that younger buyers have demanded the past couple of years. Quality will be the name of the game I think for the next few years and forward. I look for a slight rise in foreclosures, more "investor" buyers for rental property, and there are way too many condo projects currently to support that recent boom, so I think they will cool this year if they ever really took off to begin with. The area I think will be the next big opportunity, well you'll have to help me on that what do you think?

Don't take this title the wrong way, in my investment and investor services side of the business we are ALWAYS looking for a deal. Rule #1 One of my keys to successful real estate investing is you make your profit when you buy, not when you sell, so buying it right is paramount. However I think the key word in the phrase "Buying it Right" is right, and right is relative. What is right? I think the better question is...What is right for you? Ask any buyer now and you will probably hear, "I want a good deal, and from what I hear that mean a foreclosure, fixer upper, or a short sale." Obviously that is true in some regards, but definitely not always. Most people don't know how to evaluate the entire cost, and inherent risks, involved in these types of properties nor have the resources and skills required to deal with these risks and added costs. Even the most skilled and weathered investors get burned all the time. Let me present an actual scenario or two and outcomes, and offer a better scenario. Both are based on actual deals that I have participated in within the last 3 months.

Scenario #1:

A home that is the perfect starter home, first time buyer price range, that is in move in condition. This home was purchased by the owner a little over a year ago, and got a good deal, about $8,000 under value at the time. His personal situation changed and now he wants to sell it, but does not have to, nor is he under any financial stress to do so. Believe it or not, not everyone selling today is! So the home is listed at the current market value based on comparable sales in the area. A few months go by and only 1 lowball offer, several interested parties but only 1 on paper. The offer is 13% below listing price. I had a chance to talk to the potential buyers and they gave me this rationalization... "The market is down, 15-20% (which in my town it is not by the way, but according to the nightly news and Yahoo real estate it is apparently everywhere), they paid $X for it last year, the market is down so he would be crazy not to take this deal." "Also we think he should pay our closing cost, pay all the taxes for next year, and you should cut half of your commission since we don't want a Realtor to help us, we know what we are doing."

OK. Guess what I said?! (Those of you who know me can guess probably). Anyway since I am always doing what is in the best interest for the parties I represent, and I must by law, I presented the offer to my seller. Guess what he said? I quote, "Tell him that marijuana is illegal in Kentucky!" I guess he though the guy was stoned? Anyway as I analyze this I want to make three points. 1. I do not blame the potential buyers for trying. 2. I don't blame my sellers for rejecting. and 3. I think this illustrates the toughest issue today in real estate, a lack of realistic educated decisions which are tainted by a desperate-inaccurate-biased-media. (Oops did I say it again?). They were making their offer on inaccurate market conditions, and based solely on the price the seller paid for it, not what it was actually worth to them or anyone. This rationalization makes no sense, because it penalizes the current owner for getting a deal in the past, and if that same method is used when they want to sell it then they will lose money. It is absolutely an uneducated and informed decision, made by unrealistic uninformed buyers.

Better scenario #1:

Suppose the same situation had happened but each side, particularly the buyer, had accurate realistic information beforehand, and was making offers to fill their need in a realistic manner, based on realistic information and expectations. This involves "Ty's Theory of Relativity (my apologies to Einstein, this only took me a few minutes and it took him years to prove) UUB + US = NGDA$ or Unrealistic Uneducated Buyers + Unrealistic Uneducated Sellers = No Good Deal for Anyone. (i.e. $), in which the opposite creates the opposite effect = A Good Deal for Everyone!" I know that is a deep thought.....

So suppose the buyers looked at the decision this way...Knowing they want to buy a home, they want to take advantage of the lowest interest rates in years, tax credits for first time buyers, and want to be in that price range, and on that end of town, and that school district. Which in this case are all true. Suppose they had done their homework with accurate information on the market and home that fit their needs currently on the market. Wonder where they could get that, maybe here? Suppose they had looked at all of the homes that fit their needs in the area, and suppose they sit down and do a comparison and determine which home fits their needs best, then did research to determine what the actual value of that home is and make an offer based on that. When I say actual value that is the actual value or total picture of the entire purchase not just purchase price. Actual value takes into account the overall picture, not simply the purchase price.

To illustrate this I want to use another example, this time I made the mistake of not looking at the overall picture on a home I purchased for resale, and I simply looked at the purchase price not the overall deal. If I had followed my own advice I would likely have made another decision. I simply saw a home I could purchase at approximately 40% of the after repair value, and though how could I go wrong? Well after putting in an amount equal to the purchase price in repairs, I was left with a home that I had to rent instead of sell, because I had no room for profit when based on the comparable market.

So that leaves me to my final point, and point that I feel is missing in today's market. The idea that simply getting a home for a relativly low price, no matter what that idea is based on (hopefully more than the past purchase price that the potential buyers were using above), is not a good idea. They must look at the overall picture. Suppose they find a foreclosure or short sale that is 20% below the last purchase price and buy it. Is that a basis for a good deal? True they got it 20% below the last purchase price, but who is to say that the last owner didn't pay 40% too much? Not an unlikely scenario these days! Did they factor in the cost of getting this home into the perfect condition of other homes priced to the market and currently available? Carpet, paint, blinds, lighting, flooring, fence, roof, HVAC, .etc? Probably not. Well if not suddenly this great deal turns out to be a not so great deal, and a lot of unnecessary work. To illustrate that point I will offer one last real case scenario. A home that is 7 years old, in a great neighborhood, that is in the higher end of the first time buyer market price range. We spent significant time preparing the home to sell, and pricing the home in its actual value range. Move in ready perfect condition, and priced fairly. Two offers in 4 days, sold in 5. The buyers made an informed decision, their Realtor did a great job she knew the market, the true value, and they in turn made an informed decision, and a realistic offer was accepted and everyone got a fair good deal. That means everyone made some money, buyers, sellers, me, and their agent to. I would love to have more of those deals, so I am again posting my theory, this time it is the good side of the equation.... UUB / US = NGDA$ or Unrealistic Uneducated Buyers/Unrealistic Uneducated Sellers = No Good Deal for Anyone. (i.e. $)

IRB / IRS = RGDA$ or Informed Realistic Buyers + Informed Realistic Sellers = Really Good Deal for All. (i.e. $)

Now is this to say that buying a foreclosure, fixer upper, or short sale is never a good idea? NO!!! They are often good deals to be found there, but they are not simply good deals because they are fixer uppers, foreclosures, and short sales. When factoring in the cost of getting many of these properties up to the condition of non distressed homes the costs often equal or surpass the cost of buying one that needs no work or repair. All I am saying is that the entire picture and price must be calculated into the decision to buy or sell a home in today's market. Most importantly, in the words of Waylon and Willie, Realtors Don't Let Your Customers Grow up to Be uneducated uninformed Buyers or Sellers....and people please be an educated buyer, not a bargain shopper, stick to the yard sales for that... there are plenty of good deals to be had that are not foreclosures, fixer uppers, or short sales.