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Archive for the 'Real Estate' Category

10 Questions to Ask When Choosing Your Real Estate Agent

House For Sale SignThere’s an interesting little article on the Dumb Little Man blog listing 10 questions he recommends you ask your real estate agent before choosing them. Each question comes with the standard answer you will likely get from the agent, as well as a “Tip” on how to probe deeper and what answer you really want to hear. Although I agree that they are all good questions, I don’t know that I’d ask each and every one of them myself. In any case, it’s definitely worth reading.






Local Ottawa City Contractor

Normally I avoid recommending local contractors because of the potential downside (will they continue to provide quality work, etc.) but today I’m going to make an exception. I’m giving a public recommendation to Elgin from Elgin Eden Contracting. Just a quick tip though, if you need work done call him sooner than later because he’s generally very busy and therefore has a waiting period. If you’re in the local Ottawa region you can get a hold of him at: (613) 858-9034.






An Ounce of Prevention Really is Worth a Pound of Cure

I again re-learned from first-hand experience that an ounce of prevention really is worth a pound of cure. How? Two of the windows to my own house leaked because the caulking had gotten old and cracked which caused water to leak in. The water saturated some of the framing wood, caused a lot of mold (in no time at all might I add), and basically ended up with two half walls being replaced to get at the problem. A very expensive lesson to learn again.

For those of you who read this blog regularly, you know that I’ll look at the numbers to really see if the cost of the prevention really outweighed the cost of the repairs. So let’s not waste anymore time and look at them right away.

Since the costs for the repairs can fluctuate quite a bit, I’ll make a worse and best case scenario. In the best case scenario, which luckily pretty much happened for me, you won’t need to replace the actual windows (especially if they’re higher-end windows), much of the framing, any of the flooring, etc. The worse case is that everything is completely water saturated and full of mold. In my particular case, in both rooms only the framing below the windows was saturated with water and mold. The rest of the framing, the flooring, and the windows were all ok. So what’s the total cost? Seeing as I had to rip open two walls, replace some framing, etc., a round number of $1000 for labour and materials is easy to achieve. This could however easily climb to $5,000 – $10,000 if new windows need replacing, if the floor is finished, if the water damage spread to the floor below, etc. So let’s assume a small round number of $2,500. Is the prevention worth $2,500?

Caulking

I quickly went to Amazon.com and looked at the price of caulking where one tube of GE Silicone II caulking will set you back $6.89. Assuming this price, for $2,500 you can buy 362 tubes of caulking. For a standard sized house, I can’t see anyone using more than 10 tubes of caulking (including windows, doors, vents, etc.). Going further, let’s assume we need to caulk every 3 years (this is aggressive, generally you do it every 4-7 years). Looking at the numbers:

$2,500 / $6.89 = 362 tubes of caulking

362 / 10 tubes per session = 36 caulking sessions

36 caulking session * 3 years in-between each session = 108 years of caulking and leak free windows!

Therefore we could have spent that same money we did on repairs and bought caulking for almost 2 full lifetimes and saved ourselves from all leaks in the future (well at least all leaks due to bad caulking) in our lifetime. So yes, in this case, an ounce of prevention is really truly worth a pound of cure!






Common Real Estate Ad Terms and Their Relationship to Selling Price

FreakonomicsThose of us who have dealt with the real estate market, we are all too familiar with the many terms used to describe a real estate property. Terms like “spacious”, “state of the art”, “charming”, etc., they all bring up different mindsets. To the untrained real estate investor, these terms can be confusing. However over time you start to get an understanding of what they really mean. For example, a “great neighborhood” often means that the houses in the neighborhood are nicer than the one being sold. No one will go out and say they’re selling you the ugliest house on the block, rather they’ll put a positive spin, such as you have a great neighborhood.

In any case, in the book Freakonomics, they did a detailed study of the many words used to describe real estate properties and they found strong correlations between the words used in the ads and the selling price of the properties. Now before I go on, please note that correlation means that the two items are related but it doesn’t mean that one causes the other. So for example, there is a correlation that cars painted yellow get in fewer acccidents. Does this mean that if you paint your car yellow you’re less likely to get into a car accident? Not at all. One does not explain the other. You have to look at other factors. In this particular example, the reason that yellow painted cars get into fewer accidents is because of the type of person who buys and drives a yellow car rather than just the color of the car.

Getting back to words that describe real estate properties, it’s been found that the 10 most common used in real estate ads do have strong correlations to the selling price.

Top Five Terms With Higher Selling Prices

Granite
State of the art
Corian
Maple
Gourmet

Top Five Terms With Lower Selling Prices

Fantastic
Spacious
!
Charming
Great Neighborhood

Very interesting! Why do these specific terms have strong correlations with higher or lower selling prices? The book goes on to debate this, and I’m sure some of them are obvious once you start to think about it. However for today what’s interesting to note is that the words in your real estate ad will ultimately affect your selling price.

Again, I strongly recommend the book Freakonomics. There’s lots of great information on many a topic, not just real estate. If you’re interested, you can buy a copy here through this Amazon.com link.






Interesting Statistics About Real Estate Agents

FreakonomicsI’ve been reading another interesting book called Freakonomics over the last week which is filled with lots of facts and great explanations behind them. In my next article I’ll even write about another real estate related metric I found in the book. But for now, heres today’s tidbit:

Real estate agents keep their own properties on the market an average of 10 days longer and sell them for an extra 3+%. To quote the book, on a house of $300,000, that means they sell it for an extra $10,000.

Freakonomics goes into more details as to the cause, and it’s nothing negative against the real estate agent. It’s simply all about incentives, and it makes perfect sense once you understand the facts. So let’s take a quick look.

Looking at that same $300,000 property again, after breaking up the commission, etc., the real estate agent’s average take is $4,500, or about 1.5% of the total purchase price. Now if we take a $310,000 property (adding the $10,000 difference), the real estate agent’s additional 1.5% revenue on $10,000 comes to a total of $150. Therefore the question is, is it worth it for the real estate agent to work an 10 additional days (have more showings, consume a lot of time, take away time from selling other properties, etc.) for $150? I agree with the author, probably not, the incentive just isn’t there. Would you work an additional 10 days for $150? (yes I understand that it’s not 8 hours a day for 10 days, but it still does eat up a lot of time over those 10 days). Now if you change that $150 difference to $10,000, then again I agree with the author, there is substantially more incentive there.

So although the statistics clearly show that the incentives are higher for a real estate agent to sell their own properties, can you blame them? I can’t. Is there a better way to align both your incentives? Probably but I’m not sure how. If you think you do, feel free to comment.






50-Year Mortgages Increases Risk

CNN Money.com reported recently that you can now acquire 50-year mortgages! I can understand the market is becoming very competitive as the number of new mortgages is dropping, however I find it difficult to believe that lenders are offering 50-year mortgages. Assuming you acquire a mortgage at 25 years of age, that means you will be done paying your mortgage at 75 years of age, well past the average retirement age!

On top of this, assuming I understand correctly, these mortgage are adjustable. I personally like long term fixed rate mortgages because with today’s historical low interest rates, it’s to your advantage to lock in the rate (for example I locked in my personal home at a fixed rate of 5.4% for 25 years). The only benefit I can see from these 50-year mortgages is that your monthly payment will be much lower because of the term of the mortgage.

Without the protection of fixed rates, all you’re doing is giving people who normally couldn’t afford a house (for example many people in California) the opportunity to do so, but with even more risk than before. These are people that maybe even subprime lenders won’t consider that can now afford their monthly payments because of the length of the term. This just means that as interest rates continue to climb, they will affected to an even greater degree than normal lenders!

Let’s take a quick look at the numbers, you might be very surprised. I know I was!

Interest Rate Term (Years) Monthly Payments
5% 25 $2,922.95
7% 25 $3,533.90
5% 50 $2,270.69
7% 50 $3,008.44

Looking these numbers (I chose 25 years rather than the standard 30 year because of my own personal interests, but I’m sure the numbers are very similar), we can see that if the interest climbs from 5% to 7%, the 25-year mortgage increases the payments by $610.95. Now, taking the 50-year mortgage, if we increase the interest rate from 5% to 7%, the payment goes up $737.75, a much larger amount. Looking at percentages, the 25-year mortgage increases the payments by 21% whereas the 50-year mortgage increases the payments by 32%. Assuming that the people acquiring 50-year mortgages are doing it because this is the only way they can finance their properties, then the increases in interest rates are going to be much much more troubling much quicker!






New Affordable Aerial High Resolution Photography

I recently talked with the founder of a very interesting company, FlyByPictures.com, a company that specializes in aerial photography. Although not entirely a new idea, they’ve gone about it very differently than what most would expect. Actually, this is the first time that I’ve personally seen anything like it before.

 

Normally if you want to take aerial photographs of your property for advertising purposes, inspections, etc. you would hire a pilot and rent an airplane (often owned by the pilot) to go out and circle your property. Because of the flight laws and regulations, most pilots can’t get closer than 1000 feet, the lowest allowed fly zone in most cities. They will take a picture of your property as they fly by with a decent zoom and that’s what you get. As you can imagine, hiring a pilot for this can be quite expensive, often well over $1000. They will guarantee you a picture of your property, but remember this is from at least 1000 feet or more so it’s not very detailed.

Another method Yves, the founder of FlyByPictures.com, described to me is that you can take aerial photographs from someone who owns a gas powered RC (Remote Controlled) helicopter. These RC helicopters however also have limitations and restrictions because they are considered gas powered flying vehicles. Although cheaper than hiring a pilot and renting a plane, their still costly because of the price of the helicopters (generally several thousands), the fuel, the maintenance, the skills required to fly them, and especially they are bound by many rules and regulations which limit their photographing abilities.

 

Which leads us to Yves’ company’s new method of aerial photography. What he’s discovered is that people generally want closer images, more detailed, and don’t want to spend as much money, which makes a lot of sense. To do this, he’s taken a battery powered helicopter and modified it to take high resolution photographs as these (I won’t go into the details of his helicopter as these are his trade secrets). The advantage of using this system is multi-fold. First, because of the type of helicopter and modifications it isn’t subject to the rules and regulations of a gas powered RC helicopter. He can fly it up to 300 feet without any issues. Secondly, the costs are much lower than a gas powered RC helicopter. And thirdly, because he can fly closer as well as fly virtually anywhere, he can get some very amazing aerial photographs as you can see in the pictures (as well as with this video of an aerial flyby).

Because of all of these advantages he can offer a superior quality service for a lower price than his competitors. This is great news because it’s now become feasible to use aerial photography for many purposes that were cost prohibitive before. Yves’ informed me that the main intention of his company is to generate pictures for advertising purposes, such as aerial photographs of commercial buildings, golf course pictures of golfing holes, MLS listings to show the full property, flybys of new developments, etc. You can just imagine all the possible applications! It opens up whole new markets!

 

I might make it seem simpler than it is here, but I can tell you Yves definitely put some time learning how to correctly modify and fly his specialty helicopter. I personally saw him maneuver it with ease that seemed like second nature to him, which I’m sure came with a lot of trial and error. The good news is that for us, because of his investments into this new technology, we now have new tools that were before only accessible to richer clients.

All in all I can say I was thoroughly impressed with Yves’ company FlyByPictures.com. I suspect he will get very far and demand will grow quite rapidly.






How to Calculate the Real Estate Market's Overvaluation

I recently had an email discussion with someone about the real estate market and trying to determine when it will be done falling. After thinking about it I realized that although we couldn’t predict when, we will be able to easily figure out how much the real estate market is overvalued when it’s done falling. That is, we will be able to figure out by how much people are overpaying for real estate properties today.

The easiest solution that most people will think of right away is to calculate how much properties drop in price. We can’t do that! It’s completely inaccurate. So how can we really calculate the premium on today’s price? Ignoring inflation for simplification, I’m going to suggest that we can only really calculate that premium by determining how much the monthly mortgage payments drop for the same size of property.

Why can’t we just say that if a property was say $500k, and drops to $400k, that the premium was then $100k, or 20%? Because of the effects of interest rates on real estate prices! As interest rates climb back up, prices have to fall, there’s nothing we can do about that. Therefore if real estate prices fall at exactly the same rate that interest rates climb (a good rule of thumb is that for each percent interest rates climb, real estate prices have to drop by 10% to keep the same monthly payment), then we can say that the market is fairly priced today.

Since I don’t believe that the real estate market is properly priced today, I also think that prices will drop faster than dictated by interest rates. I actually think the real estate market is highly inflated. For example, a general rule of thumb of real estate investing is that your yearly rental income should cover at least 10% of your total purchase price, including renovations, closing costs, etc. This is almost impossible today for the average residential properties. Getting positive cash flow is also almost impossible in today’s market. The market is overpriced, plain and simple.

But just by how much? The key to calculating this is by seeing how much the monthly mortgage payments will drop! Again, if interest rates increase, prices have to drop to keep the same monthly payments. Therefore, if the market is efficient, and the real estate market is correctly priced, we should see little to no difference in the monthly mortgage payments. That is to say prices will only fall in proportion to the interest rate hikes to keep the monthly mortgage payments the same. Cash flow would then also remain where it is.

However, if the real estate market is inefficient and real estate properties are overpriced, then the monthly mortgage payments will drop to bring properties back to profitable levels, to positive cash flow. Therefore prices will have to fall faster than dictated by interest rates alone. If the market is 10% overpriced (assuming no change in interest rates), then we should see monthly mortgage payments drop by 10%.

So for example, if interest rates increase by 3%, then prices have to drop by 30%, nothing new here. However if the market is overpriced by 10% then real estate prices will drop by not only 30% as dictated by interest rates, but by 30% + 10% (the market premium), which means real estate prices will drop by 40%.

As you can see, calculating the premium in today’s real estate market is basically determining how much monthly mortgage payments for a real estate property drop, not how much the purchase price drops.






Biggest Inventory of Homes For Sale in 19 Years

Sales of previously owned homes have fallen for the second consecutive month, bringing the inventory supply to its largest in 19 years! The supply of homes on the market has increased by 14.3% since November 2004, a very significant increase.

To quote USAToday “Naroff, president of Naroff Economic Advisors, called the inventory figure for November a “real major warning flag for prices.” But he noted that with mortgage rates still historically low, the softening in housing will likely be “orderly.”

I personally believe that real estate prices are going to drop, and drop significantly! If rates return to their 8% range from 2000, only 6 years ago, then you can expect as much as a 20% drop in price! This is great news for real estate investors because as the market drops investing opportunities will start to increase.






The Simplest and Best Way to Protect Yourself from the Real Estate Crash

As everyone knows,were currently entering a real estate market crash, where prices have already started to drop significantly. Unfortunately for many people this can have disastrous effects, possibly even causing many to go bankrupt.The good news is that today we’ll look at thesimplest and best way to protect yourself from the real estate crash, assuming you plan on holding your properties.

The largest unknown and/or neglected risk for most people is financing and refinancing. Yes, financing and refinancing! A lot of you have recently jumped into the real estate market and are new to financing. A lot of you have been in the real estate market for a while and have also just refinanced to save money, pull money out of your properties, and/or just to reduce your monthly payments. Almost everyone’s been sold on the benefits of today’s financing and refinancing, and rightfully so. We recently went through a real estate market phase were financing was very beneficial in many ways. However most people forgot to do their homework and don’t look at the details and future consequences of different financing and refinancing options.

You should definitely be VERY interested in the details and consequences of financing and refinancing if you:

  • if you have a mortgage with less than 40% equity (that is your mortgage is for more than 60% of the value of your property)
  • if you need to refinance your mortgage in less than 10 years.

What are the details and consequences? Why are these people very interested in the details and consequences?

Because when it comes time to refinance again they might be in for a very big surprise! First, if interest rates go up, as they are heading back to their historical average of 8-10%,monthly mortgage payments will increase greatly. For example, on a $250,000 property, going from a 4.5% fixed interest rate to a 9.0% fixed interest rate, the monthly payments will increase by as much as 58%. They go from $1,266.71/ month to somewhere between $1,829.20/month and $2,011.56/ month, depending on how you did your calculations (best to worse case scenario).To protect yourself from such a huge increase, you can lock your mortgage into today’s history breaking low interest rates. We probably won’t be able to beat today’s interest rates in our lifetime.

Now,assuming you can cover that additional monthly cost, will the bank be able to refinance you when your mortgage term comes up? What most banks, mortgage companies, and anyone else who wants your financing business probably hasn’t told you is that if interest rates go up, prices have to drop (the reverse is also true where if interest rates go down, prices generally go up, as we’ve recently seen in the real estate market). The general rule of thumb is that for every 1% interest rates go up, property prices have to drop by 10% to keep the same monthly payment. Although not entirely accurate, it’s close enough.

At first this might not seem so significant, but it’s extremely important. Assuming interest rates climb from 4.5% to 9.0%, a 4.5% increase, then that means thatreal estate property prices will drop by as much as 45%! It’s probably a little less when you add inflation, so let’s assume 30%, which still a very significant drop.When it comes time to refinance it in 5 years you will only be able to refinance up to the value of the property. In the past this wasn’t a big issue because prices were going up as interest rates dropped. However today, like the real estate bust of the 1980’s, it becomes a critical issue. Let’s work through a detailed example to see why.

Let’s assume you bought a property today for $250,000 with 5% down ($12,500) with a fixed in interest rate of 4.5% locked for 5 years (variable works the same here except that your monthly payments will have increased throughout rather than only when you refinance). Now let’s assume 5 years go buy and interest rates have climbed to a historical average of 9.0%. Based on the previous paragraph, we’ll assume prices have accordingly dropped 30% to $175,000 (again not unheard of if you remember the 1980’s real estate crash as well as the Japanese real estate market collapse of the 1990’s). When you go to refinance your property, you’ll still have a balance of $227,336.39 due on your mortgage, which is more than 100% of your current property’s value.

No bank will give you a 130% mortgage, especially when the real estate market is falling. Therefore you will need to cover the difference of $52,336.39 between the balance remaining and your new property valuation ($227,336.39 – $175,000). On top of that, because that only brings you to a 100% financed mortgage, you will need to add another 5-25% to cover some equity on the property.This means that in 5 years, not only will your monthly payments go up by as much as 58%, you’ll also need to come up with more than an additional 21% lump sum payment of your initial purchase price just to be able to refinance for a 100% financed mortgage, which no bank will accept. In reality you’ll need to come up with more than $60,000 just to get a 95% equity mortgage, which will be very tough in a down market.

Let’s take another example, a less severe example. Considering that interest rates have already gone up more than 1% in the last few months, a 7% interest rate in the near future should not be too surprising. In this case your monthly payments will have increased anywhere from $1,512.47 to $1,663.26, an increase of up to 31%. Your property will now drop by at least 15% to $212,500, meaning that you’ll now have to cover the difference between your balance remaining of $235,038.47 and new property valuation of $212,500, a difference of $22,538.47. Add at least another 5% equity down payment and you’ll need to come up with more than a $30,000 lump sum payment just to be able to refinance.

Therefore the greatest piece of advice I can offer you at this time to protect yourself from the real estate crash is to refinance your mortgages with today’s extremely low fixed interest rates and lock in those rates for at least 10 years, preferably more. Also, have the mortgage both transferable and assumable in case you decide or need to sell. Why 10 years? Because no real estate crash in the last 50 years has lasted more than 10 years, prices have always come back within 10 years of the start of a real estate crash. Although it’s not a guarantee, no one can guarantee the real estate market’s future,it’s a good bet that this real estate crash will be gone within 10 years or less.

Again, the details of financing and refinancing are especially important for those of you that have highly leveraged properties or that have to refinance within less than 10 years. The good news is that if you do your math and you prepare yourself ahead of time then you’ll be able to safely ride out this real estate market crash. Not only that, you’ll be in a great position to catch the next real estate market boom wave before everyone else, which is where the big money is made.






 


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