dcRealtorRay.blogspot.com

Looking for a Deal? This is it!

2009-05-08T11:39:00.001-04:00

Friends, colleagues, and other people tell me all the time, "I'm not really ready to buy a house, but I will if a good deal comes up." Sound familiar? As soon as I hear this, I know that they are not ready to purchase a home. Why? Because most people don't know what a good deal is even if it hit them in the head! Unless you're actively looking, you can't know what a good deal is. Plus, if a truly good deal comes up, then it won't last long so you have to be prepared to move on it quickly. So, my usual response is to provide them with resources on how to prepare for a home purchase and have them contact me with any questions. But I don't send them any good deals because I know they're not ready.

Many of you might think you are ready. Are you? Let's find out. Check out this property:
http://matrix.mris.com/Matrix/Public/Email.aspx?ID=30668364884

It's a two br, two full bath in U-Street with a great floor plan for $400k. I've seen this property and the place dosen't need much work....maybe new carpet. At $400k, the interest only mortgage will be about $1700, plus taxes at $350, plus condo fee $550 (which includes your insurance and some utilities). Total monthly payment, $2600. That seems high, but let's look at the U-street rental market. Renting this place will be easy at $2200-2400 per month, plus, your interest only mortgage payment is tax deductible - which we assume 30% discount and your actual payment is $1200+350+550=$2100.

But, this is assuming that you pay full price. You can negotiate and get a better deal! So, are you really ready to buy when a good deal comes up?

Interesting note is that this isn't a gem. I'll have another post with a gem.......

I just saved my client $64K!....for a new condo!

2009-05-05T20:33:00.012-04:00

Sounds pretty amazing right? I'm sure when you first read the title you probably thought that there must be a catch right? No. I actually just got my client ratified at the Yale Condominiums for $64K below list price!

How is this possible? Well, they're not going bankrupt; investors aren't bailing; so how did I save my client $64K? A combination of things. The combination of the market, credit freeze, condo conditions, and my understanding of the developer's business model is how this happened. We've heard over and over that how the market is crashing with no end. We experienced pretty significant decline in real estate prices in the DC area. Initially, sellers were still clinging on to hope that the prices will rebound. Unfortunately, the prices didn't rebound like everyone hoped. And by the time sellers were willing to offer steep discounts, the credit market tightened up. All these things really caused real estate agents to accept the current reality of lower prices.

Next, along with the market condition, the timing was really good. As of now, the developers at the Yale Condominiums sold a little over 70% of available units. They really want to get this number up to 75% so that they can officially call this building a Condominium. Until this occurs, DC won't allow the building to be officially a Condo. So, if you were interested in the Yale, then timing couldn't be better.

Finally, with some research and several conversations, I was able to determine the seller's position. You see, builders and developers aren't like individual home owners, where emotion comes into play during negotiation. For developers, everything is based on a financial model - the cost of holding a number of units, cash available through alternative financing for their future projects, and projected income and losses. So, if you can understand what the developer's position is, then you can figure out their yes/no decision point is and how to negotiate properly. Of course, my extensive knowledge in finances and business model really helped me through this. Still, such helpful information isn't easy to find; the Yale Condo provided enough information for me to determine their stakes. I'll be honest though, I did get lucky because I understood the seller's position almost too well.

And these three things all came through together to help save my client $64K! If you're interested in the Yale, then I suggest you consider them now!

Condo vs. Co-op's. What's the difference?

2008-05-13T00:19:00.002-04:00

Anyone? Bueller?

I'm sure most of you out there are very familiar with condos, but you may not be familiar with co-ops - mainly because not may co-ops exist in DC.

You encounter co-ops much more frequently in NYC, and was made famous there when former President Richard Nixon was denied from purchasing a co-op. After President Nixon's resignation, he tried to purchase a unit in one of the co-op buildings in NYC only to be denied by the co-op board on basis that the owners in the building didn't want to attention and the media circus President Nixon brings. And in this little story basically summarizes the difference between co-ops and condos.

When you purchase a condominium, you clearly know the outlines of your unit, in a 3-dimensional space. Since you purchased your space, you can do almost anything you want to it without endangering or infringing on your neighbor's ability to own a home. However, in cooperatives, you don't own the outlines of your unit, in fact, you only own a share of the unit and you have the right to use that property. Basically, co-ops are more like a company where you purchase x number of shares of that company, and with those shares, you are given a right to use or rent (at no cost) the unit from the company.

Because of this difference, you have much stricter rules in co-ops where each purchaser has to be individually approved by the owners of that unit. The owners can decide to disallow you from purchasing a home in that building for any reason as long as the reason doesn't violate national and state Fair Housing laws. So, in essence, if everyone in the building owns Lexuses, and you drive a Honda, the owners can discriminate against you for driving a Honda. Of course, this is an extreme scenario, but can happen.

Then why would anyone want to live in a co-op? Co-ops were designed to specifically protect the owners against bad tenants. Just about all co-ops have rules against renting, where you can only rent out your unit for a year; maybe two consecutive years max. The idea is that tenants will not take care of their unit or the common area as well as the owners and they want to preserve the units. Therefore, theoretically, co-ops are better than condos. But then why hasn't this caught on with people? My opinion is that people don't understand co-op's fee structure, which is higher than condos and therefore did not want to bother with them.

But fear not, I'll enlighten you here.

When you purchase a condo, everything is clearly outlined. Here's the home for sale. Your "home" is bounded by this, the price is $400,000, your condo fee is $350 and it covers water,common amenities, etc. Very simple to understand. However, in a co-op, the fees are split up into two mortgages - the building's and yours. The building itself has a mortgage based on what it cost to build and was sold for to the original owners and you have another mortgage that pays for purchasing the shares of a particular property based on market price.

For example, if a 1 br co-op is on sale for $400,000, then the monthly payments usually get split up into $200,000 (usually somewhere in the 50/50 or 60/40 split) in your personal mortgage to purchase the share of the property and the remaining $200,000 gets paid to the co-op board in terms of the typical fees (similar to condo fees). In short, the amount of money you pay is the same, but how you pay changes depending on the co-op's financial structure. This is why people balk when they hear co-op fees of $1,500 per month, without realizing this distinction. Further co-op fees include taxes whereas condo fees do not - something most people don't calculate when first crunching numbers on what the buyer can afford. A $400,000 condo/co-op will run you anywhere from $300-500 per month in taxes and that is disclosed up front in the co-op fee.

In summary, the big difference between condos and co-ops is that co-ops have more right to accept or reject who lives in the building, and the exchange in funds are different. One more thing to note, however, because of the low popularity in co-ops in DC, many mortgage brokers don't know how to process co-op and may not be able to get you the loan. Think of it this way. If you avoid things that you're not familiar with, then the banks will too since they take on a huge burden. This doesn't mean co-ops are bad, but that you are limited in bank choices.

Caveat Emptor Buyer Beware!!

2008-05-12T23:49:00.006-04:00

Thinking about buying a home in Virginia? Have you heard of the term Caveat Emptor? You can get the Wikipedia definition here.

This term is important when purchasing a home in Virginia because the sellers do not have to disclose ANY DEFECT about the property. This means a house can have a flooding basement, a leaking roof, a drug dealer next door, and they don't have to say a thing. However, in DC, you have to disclose ALL material facts that the owner is aware of. While I'm not a lawyer, I thought you should know this fact.

VA's history - this law was a result of an incident that happened in the VA Beach/Hampton area where a house was well known for the basement flood on a rainy day. It was so well known that almost every neighbor knew about the flooding problem but the buyer never asked. You then have a buyer, not knowing this information purchases this house, and on the first rainy day, the basement flooded. Naturally, the buyers were upset and decided to sue the seller for their negligence to disclose such pertinent information. Well, unfortunately the result was that the information was so readily available that the court ruled for the sellers stating "caveat emptor" as the reasoning....meaning that the buyers should have done their due diligence.

This was obviously an extremely case and won't expect such events to occur very often, but you don't want to be part of the landmark scenario. So, how do you protect yourself? First, inspect the house carefully. Visible signs of any damage is a clear indication of any possible issues. Second, hire a home inspector. While the home inspector can't, and won't, clearly identify the cause of the issue, he should be able to help you narrow down the possibilities. Third, ask lots of questions, especially to your Realtor? While Realtors may not be builders, we have seen lots of homes and we can detect a pattern of home defects.

Sign a "Buyer Agency Agreement"? Why?

2008-05-12T22:57:00.009-04:00

Realtors often ask potential new buyers to sign an “Exclusive Buyer Agency Agreements” prior to showing them homes. Naturally, most people are thinking: “there is no way I’m signing something with a Realtor I just met.” And it’s ok. Some surveys rank Realtors below used car salesmen when it comes it trust and honesty, so of course you are going to be skeptical. However, you should know that signing a Buyer Agency Agreement can be beneficial to you. But, before you sign, you should definitely be comfortable with the agent before signing an agreement with him or her. The following outlines how a buyer agency agreement can help you:

First, it doesn’t cost you a thing. You pay nothing, yet you get professional advice on how to go about purchasing your home. Remember, the Realtor is to serve as your agent, meaning they should act and help you make decisions as if the Realtor is you and protect you to ensure you don’t go into any agreement that hurts you, at the same time find ways protect you. However, you could argue that you are indirectly paying for the buyer agent’s fees since you’re “writing” a check for the house. You could even extend that argument that you can save 3% on the house by bypassing you as the buyer agent and get that 3% discount. Sounds great, but that’s not how it really works. Buyer agents are not technically paid by the seller, but the listing Realtor. Meaning that before a house is on the market, the seller has already has agreed on a listing agreement with the listing Realtor set at a certain % of the sales price, typically 6%. If you have a buyer agent, then the listing broker pays the buying broker 3% of the 6% to secure a deal. Listing agents love it when you purchase a home directly through them. Why? Because the listing agent gets the full 6% commission AND he doesn’t represent you. Meaning that his job is just to have you sign the necessary paperwork but won’t have to protect you in any way since he is already serving as an agent of the seller. That means the selling agent doesn’t have to tell you that the foundation could be sinking, or that water damage in the basement could be serious. You can have a dual agency agreement, meaning the Realtor represents both the seller and the buyer, but is that really protecting you? Listing agents will even pretend to give you a 3% discount by not having a buyer’s agent, but this discount would have occurred regardless whether you had an agent or not. In fact, if the seller is so eager to quickly give you a 3% discount off the listing price, then buyer agents should be able to get you a bigger discount.

Technically, agents aren’t representing you w/o a buyer agency agreement. This means that, by law, if you are visiting homes with an agent w/o a buyer agency agreement then the agent technically represent the seller and doesn’t have to protect you, the buyer. Of course this is not how the industry works. However, remember the possible problems I’ve identified in the previous bullet-point? Yes, the same thing could occur.

You’re not hiring a chauffeur; you’re hiring a buyer agent to look out for your best interest. You’re hiring him for his knowledge, his experience, and his expertise. An analogy I’d like to make takes us back to the first time we used a computer. For most of us, a computer was a big, heavy, black & white machine that was considered “delicate.” During your normal usage, the computer would do funny things where it would just “freeze” or just stop working. The first time this occurred, you didn’t know what to do so you called someone for help and he told you to re-start your computer. Second time this happened, you didn’t know what to do and again you called for help to got the same advice. After a while, you’ve experienced these problems enough to know that you just need to re-start your computer to fix most of the problems. This sort of experiences is what buyer agents can help you with, except that it’s much more important because you don’t want to make a $700K mistake. You may only purchase and sell a handful of homes in your lifetime, but Realtors do this much more frequently and are experienced to help you sort through potential dangers. My belief is that an intelligent Realtor can make up for experience, and experienced Realtor can make up for lack of intelligence, but just make sure you don’t get caught in with a double-negative.

Price – everything is about price. Every house has a price. You may hate the house, but I’m pretty sure that you will buy that house if the seller sold you that house for a $1. So, that’s what a buyer agent is here to do – or should do. Let’s say you have two homes, home A and home B. Both single-family homes A & B are in the same good neighborhood, has four bedrooms, three full baths, and the structure and floor plans are identical. However, home A has a new kitchen, new bathrooms, new hardwood floors, and a finished basement, but comes at the cost of $50k more than B. Well, $50,000 is a lot of money, so I’m definitely going to purchase B. It’s cheaper and therefore it has to be a better value; the houses are almost identical. Well is it? Possible, but not necessarily. What I like to do is take home B and add in costs for upgrades and then compare. For example. A new kitchen that has new cabinets, new gourmet stainless steel appliances, new tiles, and new granite countertop will cost $20,000. The new hardwood floors will cost another $8,000, new bathrooms will cost $3,000 each and $6,000 for the master bath. So far, that’s additional $40,000 required to make home B look like home A. We then add another $15,000 to finish the basement, which puts the price of home B higher than home A. Then, since home B isn’t updated, the owner did nothing to take care of the house to do the everyday maintenance such as caulking, paint touch-ups, and proper winterization, servicing, which means the house can break down much faster. So, it looks like $50,000 discount doesn’t seem like a good deal. While the Realtor can’t tell you exact pricing to make the homes identical, Realtors can give you ball-park figures to ensure that you’re not excessively overpaying for the house. But then you have to answer the question: do you want a home, or a house? A home is your home, as in “there’s no place like home.” A house is an investment, a value proposition. Understanding what you want will save your significant amount of time.

Price II – negotiations. As I mentioned in the first bullet-point, if the seller is eager to give you a 3% discount very quickly then buyer agents should be able to do better. Realtors are experienced in negotiating on the price and can help you negotiate the best price for the house. We have all the previous sales data and use that to argue your position. And in some cases, we can even predict whether the buyer has room to negotiate at all with you.

Further, buyer agents will help you identify different things to help you better understand the houses you visit. For example, how to identify the overall quality of construction by checking the quality cabinets, hardwood floors – wide plank or standard, type of faucets they used. Additionally, I help my buyers better stand what could be occurring behind the walls. I try to leverage my two engineering degrees and my experiences as a developer to point out potential problems, such as the existence of polybutylene piping – which some insurance companies will not insure homes with polybutylene piping because of high failure rates. My goal here is to help you look at a house in a different light that can help you make an informed decision.

Buyer agents also need to do the work to help understand YOU. After spending some time with the buyers, the agent should have a general understanding of what you are looking for. The agent may have new ideas that may help you, or help you eliminate existing ideas. I try to go even further. Once the buying agent understands what you are looking for, you’re desire to see homes go down significantly. It’s just part of the learning curve that occurs and you know what you don’t want in a home. At this point, let’s say you saw a home that looks very interesting but there are no photos of the property? In this case, I will drive to the house, take multiple photos of the place, and even put up a quick video on Youtube.com to help you get a better understanding of the property. Most of the time, that’s enough for my clients to know whether they want to visit the property or not.

So, after such a long thread about buyer agency agreements, when should you sign? First, a quick meeting or a discussion over the phone about what you’re looking for and how the agent’s experience can help you with this. Then, maybe go out and see a couple of places and see if the agent is someone you can trust and truly look out for your best interest. After a few times out, you should know if you’re ready to move forward with the agent. Besides, you can always part ways if you decide you don’t want to work with the agent.

What's your goal?

2008-05-10T10:46:00.001-04:00

You've been searching for months now and you still haven't found a home you want to buy. You've spent every weekend with your Realtor visiting homes after homes in the past few months. The houses you like are too expensive, and the houses in your price range are not what you like. While you feel like it has taken too long but you don't want to make a mistake in the "biggest" investment of your life. And besides, the market is bad. I'm not going to pay full price. My friends and these blogs I read says I have to get 10% off the list price so I'm not going to settle.

Sound familiar? Yes. I've had some clients like this. My question to you is, what is your goal? Do you want to buy a home or not? Notice I said "home" and not "house." A home is a place you come home to, your base camp, your sanctuary, etc. It's a place you want to be, not a place you got a sweet deal on. I tell people that regardless of the market, I (a practicing Realtor) am willing to pay 10% above the asking price to get the home I want. That means, even in this market, I'm willing to pay $70K more to purchase a $700,000 home. Why? Because I want to come home everyday and love the place I call home. I don't want to think "I got a sweet deal." If you only care about a deal then you might as well said "while a trailer homes wasn't my choice, I got it at a sweet deal on it." So, I say again, you have to know what your goal is. If it's to buy to rent, then it's just a financial model. If not, you should buy a home you love.

While doing this, you want to do it efficiently while eliminating choices. First, pick a neighborhood you want. Next, visit various types of places - even those you may not think you want. Once you visited a particular type of place, the rest will be very similar so you can start eliminating them. Then, keep progressing until you can narrow things down.

If not, you may end up in the same place you started which isn't the best use of time. Think of it this way, if you spend 100 hours to save $10,000, then that's a saving(earning) of $10/hour. Conversely, a person making $60,000 per year make $28/hr while at work. You get a much better deal by leveraging your background to make more money.

And don't religiously follow the recommendations of saving 10% off the listing price. Why? If I listed my house for $7 million, then sold for $700,000 then you saved 90% off the listing price. Is that a good deal? No. you should only pay attention to what's sold in the area: the comps. Trust me, I have a very technical and statistical background and most of the blogs out there that does such analysis is so horrible that a high school student could have performed them. These are the same people who doesn't properly understand difference between the mean and median.

Lastly, if you believe that this is the "biggest" investment of your life, then you especially don't have to worry about short-term fluctuation. The real estate purchase is similar to the stock market. It's a long term view and everything will even itself out in the long run if you buy in the right neighborhood. Besides, we live in a transient world. The days of having one job and living in the same for for 30+ years are over. You're going to buy another home again.

"I'm going to buy when a good deal comes up"

2008-05-08T11:07:00.001-04:00

This is one of the most common statements I hear from First Time Homebuyers (FTH) - "I'm going to buy when a good deal comes up." What does this mean? Well, to me, it means that you're not even close to buying a home.

Why? Because this tells me that the buyer is not committed and just "shopping around" and because the buyer probably has no idea what a good deal is. I've helped many FTH and just about every single one says this, yet, when I actually show them good deals, they never buy the place. In fact, they don't even consider submitting an offer.

I was perplexed the first few times this happened, but then I was able to figure out why - because the "buyers" were not ready. You see, a home isn't just something you buy because everyone else is doing the same or because you're told to do so. It's a major investment. Thus, you need to be truly committed and believe that buying a home is a logical step in progressing your life. Further, buying a home isn't just a financial decision; it has to fit your lifestyle as well.

So when are you ready to buy a home? Well, if you're serious, then you need to know:
1) how much you can afford
2) what general neighborhood(s) you want to live in - try to limit to less than 3
3) what type of homes you can get in the neighborhood

I know this is a lot, but you're not ready unless you know these things.

FHA loans - Don't call it a comeback!

2008-04-17T15:38:00.002-04:00

FHA Mortgages, here we come!

With our current mortgage crises, people with good jobs and little cash on hand are having a tough time buying houses. But fear not, you have an option – FHA Mortgage. FHA mortgages are not actual loans, but a method of protecting mortgage lenders by the government against losses that result from defaults on home mortgages. The whole purpose is to help people buy homes with as little as 3% down These loans became unpopular with the real estate boom because loan terms did not keep up with the transient market. Now the market has changed and ready for action. However, the rules were modified and now you can take advantage of them.

The basic rules are (in no particular order):

1. The mortgage must follow FHA loan limits:

a. 1 unit: $729,750

b. 2 units: $934,200

c. 3 units: $1,129,250

d. 4 units: $1,403,400

2. Borrower must have 3% in cash for closing/down payment, and must put 2.25% of it towards the down payment. For example, if the loan amount is $100,000, then the borrower must have $3,000 in cash and $2,250 of the cash has to go towards the down payment. So, the new loan amount is $97,750. The remaining cash has to go towards closing. The trick, however, is that the sellers have to pay for most of the closing costs, up to 6%. This shouldn’t be too big of a problem since it will just be part of the negotiation – ask your Realtor about it.

a. However, if your house is in a “Declining Market” as designated by the FHA (there are multiple definitions of a “Declining Market”…..more to come on this later), then you are required to put down an additional 5%. And that puts us at 8% cash in hand. Fear not (yet) though. According to the FHA DC is not considered a declining market…but could change soon.

3. Appraisal must be performed by certified FHA loan appraisers. However, my years of experience tell me this is one of those tricky areas since appraisals are subjective and can cause problems.

4. Borrowers are required to pay mortgage insurance of 1.5% of the loan price at closing, and an additional 0.5% in insurance fees annually.

5. For condos:

a. Incomplete condos can be purchased through a “spot” loan. FHA allows only one “spot” loan per lender (Bank of America, Wachovia, etc.)

b. For non-“spot” loans, the condo has to be fully completed for a full year, provide proof of hazard insurance, 90% sold, 50% owner occupancy, 10% maximum single owner, and one of the following:

i. If more than 30 units, then maximum of 10% of the units can be financed by FHA.

ii. If less than 30 units, then maximum of 25% FHA financing.

6. Currently there are no credit score requirements for FHA loans, but this could change

7. Home must be owner occupied.

8. A borrower can have up to two FHA loans at one time based on loan amounts.

9. Other notes:

a. Cost is 1% loan origination fee

b. Assume 45-60 days to close

c. Assume 3 weeks to schedule an appraisal

Quite a list huh? By now you’re probably wondering one of two things:
1) Why would anyone go through the trouble to get such a loan? and
2) At what point does this loan make sense for the regular consumer?

Well, first, this loan is best for those who don’t have a lot of money to put down. Otherwise it doesn’t make sense. Most people who take this loan, takes it for the maximum loan amount. Then, what about the regular consumer who has the money and think he can make 11% on the stock market by putting down as less as possible. It sounds perfect! Well, not really. I did the numbers for 30 years and the annual 0.5% insurance cost is what ends up killing you. So, it’s basically not worth it to go this route. If you don’t believe me, then do the calcs yourself.

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

2007-11-19T15:16:00.001-05:00

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?

2007-03-23T14:51:00.000-04:00

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

2007-01-18T13:48:00.001-05:00

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?

2007-01-18T00:25:00.000-05:00

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

2007-01-12T11:21:00.001-05:00

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.