Is now a good time to buy a home? Part II

I posted a blog months ago that tries to solve the dilemma of buying a home vs. renting. My previous graphs and charts explained that it's not necessarily advantageous (in an investment scenario) to purchase a home if you are only planning on selling it in a few years. Then when is it a good time to buy? I'm going to tell you one of the many analysis I did that convinced me to buy, regardless of the market.

If you are looking for optimized investment scenarios, then you probably know by now that real estate is not your best bet. Traditionally, real estate investments average only 6.5% return on investments while the stock market averages 11% return on investment. However, traditional real estate investments are safer than stock markets because real estate has a land scarcity element to the investment. A Stock is nothing but a piece of fancy paper that signifies ownership in a company but real estate has a physical property that cannot be destroyed (maybe unusable but not destroyed). This point is why I would always pay more to live in the city rather than in the suburbs. Homes in the suburbs were large homes built on large lots but if you run out of room, you can always subdivide the land to build two- even three homes on a land that used to have one large home. This scenario is very difficult in the city since the homes were built almost a century ago and on small lots and you only have so much space in the city.

Next, although real estate only nets you 4.5% less than stocks, the total money earned in the long run can actually be more than just using the money on the stocks alone. How? By leveraging your earning power. Leveraging investments is a difficult concept for many people however, it's one of the most important concepts in personal finance. Let's say for example, you earn a paycheck of $5,000 per month (take home pay) and see how the earning breaks down (the scenario is a hypothetical one).

If you rent: If you own:
Salary - $5,000/month Salary - $5,000/month
Rent - $2,000/month Mortgage - $2,000 (after benefits from blog part I)
Car loan/insurance/gas- $500 Car loan/insurance/gas - $500
Groceries and other necessities - $500 Utilities, food, other spending - $500
Personal spending - $500 Personal spending - $500
Remaining $ - $1,500 Remaining $ - $1,500

As you can see, by renting, you basically throw away $2,000 in month everyday and you could argue that it could be the same with the mortgage if you have an interest only loan. However, at $2,000/ month, you could afford a $250K loan to purchase a home. And, you have a 6.5% return on your investment component that earns you $16,500 annually ($165K in 10 years), which you would never have made. Remember, that you'll always need a place to live and if you're spending the same money AND if you think long term, this decision is a no-brainer.

Now taking the same example, buying your first home is still better than renting and investing your $ into stocks because your overall return is higher due to your higher leverage. Meaning that, since you'll always need a place to live, you'll always pay that $2,000 per month (or whatever it may be) to live. So let's say that you rent, and you invest in stocks that net you 11% annually. Then, your stocks are only earning you $1,800 annually (not accounting for compounding effects; 10% of $1,500 x 12 months). In this scenario, you're losing almost $15K by not purchasing a home. Yes, you could argue that $1,50o per month can be used to get a margin account that nets your more money in the stock market. This is true but 1) you will not get as much leverage as your home since your home has tax benefits, and 2) if you're really trying maximize your investments, then why not buy a home AND use the same remaining money into the stock market? This way you'll earn on both ends.

The next question is then, what about this bubble and that you don't ever want to buy at the peak of the market? The answer to this question is the same with all investments. You can't look at things short term. Let's look at the stock market again. The dot-com bubble dramatically increased stock prices in the late '90's and early '00's. Then the crash came and people lost lots of money with no leverage (at least in the short term). So, did everyone lose money?

NO! Although the bubble burst in 2000, by 2007 the S&P 500 is back to where it was before the bubble burst. This is a hard lesson that you should invest for the long-term! For people who did invest in the long term an still lost money - well, you invested in speculative stocks.....that's a whole new risk and I won't cover that here. This same logic applies to real estate investments:

As you can see, we had a small real estate market downturn back in the late '80's and only to have it picked up a few years later. I'm just expecting the market will take a little bit longer to pick up since the growth rate of real estate investments have been significantly higher than before.

In conclusion, I decided to buy my first home based on the thinking and the analysis as described. Of course I've done even more analysis based on the locality of the DC market but I'll save those for later.

Buy the guaranteed lower price condos! Real or Fluff?

In 2003 and 2004, the demand for new construction condominiums was so high, builders didn’t offer any incentives (either price or upgrades) to the buyers. Now that the market has changed, we’re noticing the builders for these new construction condos are lowering prices, negotiating offers, and even offering “Lowest Price Guarantees.” One particular property, the Park at Courthouse, is offering this guarantee and I decided to investigate to write about it here. My questions were: 1) is the guarantee real? and 2) how can they offer such guarantee, considering the prices are probably lower than other condos to begin with?

Since 2003, the prices of condominiums in Arlington (among many other places) sales prices soared, but only to come back down. Now we know the double digit increase is a thing of the past and the immediate future of condo or real estate market looks cloudy. Regardless ofwhat the experts say about the future of real estate, builders in Arlington have continued to move forward to construct new condominium buildings. One particular building I visited was the Park at Courthouse.

Their advertising theme of "Turn back the clock to 2003 prices" seemed very appealing so I took a client there for a visit. As advertised on their website, the one bedroom condos at the Park really started at $328K WITH a parking space, which is generally much lower than existing nearby condos. If I were a buyer, at these prices, I would definitely choose a new construction over a unit that someone else has already christened, given all things equal. But all things aren’t equal for new constructions since there are higher risks with new condos: a) you’re buying at the same time and many others and therefore a larger % of these units are selling at the same time. Simple supply and demand says this should lower the prices considering the current market; which leads us to b) people can sometimes buy at a far lower price than others, which was catastrophic experience for Parkside Alexandria buyers. Not only that, the Park at Courthouse has an appealing "Guaranteed Lowest Price" program (which I'm sure the neighboring condo associations aren't happy with) that screams "I'm Perfect! Guaranteed!"So, I decided to do some research to see if you're truly getting a bargain with a built in insurance policy.

What I found is that the "Guaranteed Lowest Price Program" is a marketing ploy (albeit a good one). Heck Frank got them (the Park) into the Washington Post since he thought all new condos would need to go in this direction to sell large quantities that guarantees the lowest price if the builders decide to lower their LIST prices overall. The key is the word “List” when it should be based on the NET price, including all incentives and upgrades. List is too easy to manipulate in order to look good. For example:

-Customer A enters and buys a 1 BR unit at $350K and purchases upgrades for $6K to make the total; net sales price at $356K.

-Customer B is thinking of buying an identical unit at the list price of $350K but is unsure. The builder could then offer customer B the unit at the list price of $350K and offer the same upgrade as customer A for free, to make the total netprice at $350K and customer B “saved” $6K.

The problem is that the total list price remained at $350K and the builder actually makes more money with this strategy then to lower the prices of all the units by $6K. I'm not saying that the builder at the Park are offering such deals to everyone, but a good Realtor can identify such situations and a) warn you about their trick or b) try to get you that $6K upgrade for a significant discount. The sales office's argument will be that the builder has already reduced prices twice already, but the average reduction is unknown. They won’t disclose it, I asked several times. How convenient. If I were a builder I would drop prices $1,000 two times, for the mere marketability to say “Oh don’t worry, we have already dropped prices two times, see it is real”, but their Achilles heal is when you say “show me exactly how much”. I think I would rather get the free $6K upgrade then to have the prices reduced by only a thousand dollars. If you already bought a unit, ask your Realtor, and if you don’t have one, ask a lawyer if what they are doing is legal.

However, even if their “Lowest Price Guarantee” is not real their prices are still relatively low compared to the condos in the area. So, my question is how can they price it lower than their competitors? One of the reasons why the Park at Courthouse can keep the prices lower is by providing very basic features inside the claimed “luxury” condos and all the luxury features count as a paid upgrade. For example, the standard appliances are the typical white regenerators and microwave. To get the, sleek looking, black appliances, you have to upgrade for about $1,000 more (for 1BR unit). Stainless steel appliance upgrade package is $3,500 more (at Home Depot you can start with SS at $2500, but I doubt they will take off the value of the basic white $1,200 appliances and let you put in your own). The cabinets tell a similar story, where the basic cabinets are not as desirable as, nor are they as luxurious as the basic cabinets offered at other luxury condominiums. And, most of the units don’t even offer balconies, which many people feel it’s a must to have a “home” feel. Basically, the overall features offered at the Park are not as upscale as other new constructions, such as the Palestine or even existing newer condominiums. Further, the Park does not offer the same amenities as other condos. The Park does not have a pool, rooftop access, or 24-hr concierge (although they have a 9-5 hour concierge from their adjacent apartment building). But even if you upgrade all the appliances to match with other luxury condominiums and account for the floor, VIEW, sq footage, the prices at the Park are still lower than other condos, such as the Palestine. My question is then, how can they sell their units for lower than everyone else AND have the lowest price guarantee? We go back to simple and demand. They have larger quantities available and limited number of buyers. This and the fact that guarantee is a weak one at best.

One other side note – the Park at the Courthouse has 92 or so units and they are really pushing for additional sales with this guarantee. As of March 10, 56 units were still available and this is a concern because, I think there’s a requirement on the % of units that must be sold in order for the builder to transition the ownership to condo association (maybe a lawyer can verify this for me). This could be the builder's final desperate attempt to try to sell the minimum required units for the condo conversion. If they fail, then it's possible they may convert to apartments as other builders have done. The Park at Courthouse already has a sister apartment building built and it would only take minimal work to manage another very similar (maybe identical) building.

Anytime you buy a property, or anything else for that matter, think: Caveat Emptor – Buyer Beware. Before you decide to purchase, you must understand/know all the risks so that you can make the most informed decision. That's why Realtors are recommended and they are “free” and paid by the builder (most builders aren’t allowed to adjust their price for buyers without Realtors. Despite the myths FSBO people may think, Realtors are not here to get paid for the same work you can do on your own, nor are they here to get you a steal of a deal in the most desired neighborhood/condominiums. Rather, Realtors are to help you find a property, identify the risks and benefits of different buildings, neighborhoods, and then develop a strategy to get you the home you desire for as little as possible. The biggest mistakes I hear people make are from those who have jumped into a decision without the inside scoop. A good Realtor can get you that inside scoop.

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Is now a good time to buy a home? Part I

A friend of mine asked me the other day:

Friend: Ray, is it a good time to buy a home?
Ray: Depends on what you mean by good time. What are your future plans? How long do you plan on keeping it?
Friend: Well, I’m planning on going to B-school so for about two or three years. Do you think homes will be the best investment choice for the next three years?
Ray: Do you really expect me to give you a yes or no answer?
Friend: Yes.

Decision to buy a home is never an easy one and although the general public believes purchasing a home is a good idea, you have to look at your individual future plans and contingency plans. Stock brokers can’t pick stocks that beat the S&P500 but gets paid over $500K, do you really expect me to predict the future? I can’t predict what might happen, but I will give you my opinion. Regardless, buying a house all depends on your particular situation. (read this if your thinking about selling a house in three years or “flipping” it) Of course you ask a realtor about your plan the typical answer is (per Frank): Hell yeah! A house is a great investment! (Internal monologue: No risk to me, I make 3% transactions out of it: 1) Help her buy, 2) help her sell and 3) help her buy a bigger place). Do it!

Sooooooo, you’re going to have to do your own analysis based on your financial situation. Even if the house doesn’t appreciate, can you make money? Here’s a quick spread sheet of some finances you might want to consider:

Home purchase price: $180K ($180K is this the house in SE, DC? Don’t worry, this is just an exercise so ignore that part.)
Down payment: 5%
Interest rate: 6%
Mortgage: Interest only – fixed
Personal tax rate – 28%
Tax, insurance, and settlement costs are just examples.

So, it doesn’t seem like a great deal to buy a home. But GLASS IS HALF FULL DAMMIT! If the price goes up even 1% then the return is $1,800 Additionally, if the house doesn’t appreciate then you have to pay 7% for sales tax, Realtor fees, and closing costs. Of course you can try to sell it yourself but I don’t recommend that under any circumstance. It’s like you trying to defend yourself in a criminal trial. You don’t know the laws, the tricks or even the opposing side. I’m sure you can learn by reading books like “How to be a criminal defense attorney for Dummies” but you’re probably not going to have the same results. But this is a whole new topic in itself and we’ll cover it later.

The above isn’t to discourage you from buying a home but to educate you. In the next blog, I’ll identify the benefits of owning a home as well as market projections. It’s ok though.

Why should you read my blogs?

Before I start giving you advise on what you need to do to buy a home, let me tell you a bit about myself. I graduated undergrad and grad from UVA. I’ve been a Realtor in DC and VA since 2002 and I learned, so called, “tricks and trades” of the business from two of the best Realtors in the area. I first learned from Brooke Myers of City Houses a former Realtor of the Year by Greater Capital Area Association of Realtors in 1999 (Greater Capital Area Association of Realtors or GCAAR is a professional association for just about all the Realtors that are licensed in DC). Then, I decided to learn from Frank Llosa with Frankly Realty, another one of most powerful, intelligent brokers in the Area. Frank is so knowledgeable that he’s been on CNBC, Wall Street Journal, Washington Post, and Discovery Channel to name a few.

More importantly, I did my own things to gain full spectrum of experiences in the real estate field. I purchase my first house before I purchased my first car. I purchase my house when I was 23, a single family house in N. Arlington. Since then, I’ve worked as a Realtor, “flipped” several homes, including condominium conversions-a difficult task for any developer. Additionally, I have a Professional Engineering license. What does that mean? That means the state recognizes me as an “expert” in the field of engineering. How does that help you? It really doesn’t other than the fact that I’m educated and I know certain things to look for to protect my clients.

The purpose of the above description isn’t to tell you that I’m the Michael Jordan of real estate. I check cheddar like a food inspector. HOV! It’s to show you that I have some credibility. Regardless of my background and experiences, you should take all advise with a grain of salt and make your own decisions based on your education and background.

So now that you know more about me, let’s go into buying a house.

I want to buy my FIRST home

As a realtor, I have many friends who constantly ask me questions about getting in to the real-estate market. Conversations usually go like this:

You: Hey Ray, I want to buy a house. What do I do? Find me one.
Ray: Ok. What type of property are you interested in? What neighborhood? What price range?
You: uhhh….I want to live in Arlington.
Or
You: I want to live in DC.
You: Price? Uhhh….something I can afford.

Such conversations are not bad. It’s just that if you’re serious about buying your first home, then you need to do more homework before anyone can truly help. Many Realtors can help you through the basics but most of the information is available on the web. However, this information is pretty spread out and this site is to hold your hand through a first time home buying process so that you know what you need to do in order to purchase your home and so that you can buy a home with confidence.

Keep in mind, however, that all the advice I give you here is strictly based on my opinion. You will find things that you may not agree with and that’s ok, the whole purpose is to help you gain insight through the home buying process. If you find something you don’t agree with then just post your comments and we’ll have a friendly discussion. Further, my opinions are not a reflection of the companies I mention or employed by. Some of you cynics will probably say “oh, this is just a marketing ploy by Ray.” My response? Of course it’s a marketing ploy. But its main purpose is to share my experiences as a Realtor and to educate everyone on this site, including my friends, so that readers will have better insight into buying homes. Additionally, I don't have to repeat the same information to my friends if I'm out at a bar. I can just guide them to this blog.

So, I will post a series of items for you to be aware of when purchasing a home. Additionally, I’ll have helpful links to other sites that offer valuable information.