What goes down - must come up!  (January 3, 2009)
  
In every market there is opportunity.  Now that real estate has hit historic levels in terms of foreclosures, price decreases and reduction in sales volume, it's time to take a step back and consider today's opportunities.  Market indicators and history point to one thing - the market will recover.  No one knows precisely when, what the rate of growth will be, or how long it will take to reach new highs.
So, what can an investor do?  Gather resources and plan.
What resources?
 - Purchasing power:  cash and borrowing capacity
 - Information:  market conditions
Now is the time to create an investment plan that includes potential scenarios that will earn you the rate of return you want on your money.  Once conditions make one or more of your scenarios viable, it's time to get back into the game.
Where to go for information and planning assistance?  Drop us a line:  john@jsrealproperty.com

Lehman Brother and Merrill Lynch - not the end of the world.  (September 15, 2008)
  
We woke up this morning to the collapse of Lehman Brothers and sale of Merrill Lynch to Bank of America.  While our thoughts and prayers go out to employees now without jobs, it's also important to keep the role of these companies in perspective.  As brokers, they buy and sell shares in other companies.  Those companies didn't fail, only the broker failed.  Some would say that brokers are overpaid compared to what they contribute to the market in general.  Financial sector executives typically earn two or three times what executives in other sectors earn.  Million dollar bonuses are common, along with multi-million dollar golden parachutes when high ranking executives are fired.  Although there are fewer brokers on the other end of the phone line this morning, can businesses and consumers still find a broker to buy and sell their stocks today?  Of course.

What will it take to start the housing turn-around?  Simple:  buyers.  (August 18, 2008)
  
An economy has a lot of moving parts, both on the national and local level.  The strength of the US dollar, oil/energy prices, food prices, employment rates, and more.  When consumers feel that their jobs are secure and they can afford to own a home, they buy.
Currently there are more properties for sale than there are buyers.  In an economic world driven by supply-and-demand, it's easy to see that having more buyers than properties will cause prices to drop.  When there are fewer homes for sale and more buyers, prices will go up.  When easy-to-qualify-for mortgages began to go away, the number of buyers in the market dropped.
So, what will it take for a turn-around to start?  In simple terms, the number of properties for sale needs to decrease while the number of buyers increases.  This shift is underway.  As I talk to agents who sell foreclosure and other properties, I'm starting to hear that they are receiving multiple offers for these properties.  Foreclosure rates are either steady or decreasing in many areas.  Potential home owners are finding that there is plenty of mortgage financing available for qualified borrowers.  Let's watch the inventory of homes for sale.  As inventory decreases, prices will start to increase and the rush will be on to buy low, thus spurring the recovery.

"Prices are relative" - Is it always a good time to buy?  (July 28, 2008)
  
What does it mean - "prices are relative?"  Simply put, it means that in a given market, if prices are low for a seller, prices are also low for a buyer.
Large-scale real estate investors look for "market inequality" to put some extra punch in their profits.  They look for opportunities to sell property they own in a market that has appreciated and use cash from the sale to buy property in a market that is currently down, but that they believe will appreciate in the future.
For investors who usually buy, sell and operate properties in a single market (the vast majority of real estate investors), prices for buyers and sellers will move up and down together - will remain relative.  Knowing that, when is the best time to buy and when is the best time to sell?  The answer is - if plan to buy and sell at about the same time, any time is a good time.  Of course, if you are only selling you want to sell when the market is high and if you are only buying you want to buy when the market is relatively low.
But if you have a property that isn't performing and you want to move your equity into a property that has greater up-side potential, anythime is a good time.

Any comments?  Tell me what you think on our message board (see Home page).

"Dual Agency" A Conflict of Interest Or A Cheap Way to Hire An Agent?  (July 14, 2008)
  
I talk a lot about the agent that approaches a real estate investor and says, "I've got a great deal for you."  Some of these deals are great, some aren't.  Very often, the agent is working on a deal for THEM as they seek a buyer for a listing they have.  Agents call representing the buyer and the seller "getting both ends," but the technical term is dual agency.
Dual agency exists when a single agent represents buyer and seller or when two agents employed by the same broker represent the buyer and seller.
Opinions vary on whether or not dual agency is ethical or unethical.  Many brokers won't allow dual agency transactions in their office.  The California legislature has considered outlawing the practice several times in recent history.  Regardless of any legal considerations, investors and consumers should consider whether or not they can get the representation they deserve by hiring the same agent or broker employed by the other party in their transaction.  The typical argument from agents is that they can represent both sides without revealing confidential information to either party and that they can reduce their commission a little because they are getting paid by both sides.  The typical argument against is the old question:  "would you hire the other side's lawyer in a law suit?"
Any comments?  Tell me what you think on our message board (see home page).

"Affordability" Is Up  (July 7, 2008)
  
Large numbers of foreclosures and a generally slow real estate market have created the opportunity for many fully qualified home buyers to find great deals on homes in every price range.  While we are all sad that many good people have lost their homes, we also celebrate the reduction of prices that is providing a chance for hard working families to enjoy home ownership.  Any comments?

Energy Audits:  Not Here, But Coming  (June 23, 2008)
  
When I worked in management consulting, providing clients with energy audits was part of each cost control project.  Specialists in energy management would descend upon factories, offices, and transportation centers looking for "leaks" - work processes or physical conditions that waste energy.  The State of California has been looking at ways to gain access to residential and commercial buildings, including homes, to conduct mandatory energy audits and implement energy controls.  The state assembly recently passed AB2678, a bill that originally required energy audits and implementation of energy controls at "point-of-sale."  In other words, before a building of any type could be sold, the seller would be required to hire a contractor to conduct an energy audit and install fixes to energy leaks before the sale could be completed.  This bill was opposed by most real estate industry associations and consumer groups and the requirement for point-of-sale audits was deleted from the final version of the bill.
Looking at the requirement objectively, it's a good thing that audits were deleted.  The requirements were murky - no specific audit processes and no specific standards for energy usage.  The sale of any type of property would have been slowed to a crawl.  The cost of each sales transaction would have skyrocketed to pay for the audits and the fixes.
Sure, reducing energy costs is good for everyone.  But jumping into point-of-sale audit requirements without specific processes and standards would create a significant jolt to a real estate market that is already in a depression.  Experts estimate that 95% of existing real estate would require some sort of energy retrofit.  Utilities have taken a better approach, providing free audits for homeowners and helping to voluntarily implement energy usage controls that balance advantages with the cost of implementation.  Businesses are already plugging energy leaks, motivated by saving money and boosting profits.  Nobody needs the government to step in, but given the politician's greed for control over everything, I'm sure point-of-sale audits will be back in the near future.  We can only hope that the politicians can be stopped again.


Foreclosure Purchases:  Good For The Economy   (June 9, 2008)
  
You may have heard some of the choice names being used to describe investors who are purchasing foreclosed properties at bargain prices - bottom feeders, equity pirates, and a few others that good taste requires that I not mention here.  The truth is that these purchases are an important part of America's economic recovery.  Converting non-performing assets (unoccupied, foreclosed homes) into properties that generate income for the new lender, the new owner, and all the contractors, service providers and utilities who maintain the property, provides a flow of cash into the general economy that is beneficial to everyone.  And don't forget the county tax man, he needs income from these homes, too, or else he has to raise the tax rates for everyone else.  Whether used as the new owner's residence or a rental property, getting the home back into the economic mainstream is, as Martha Stewart says, "a good thing."


Eminent Domain - the truth about Propositions 98 and 99.   (June 2, 2008)
  
For those of you outside California, please excuse me while I directly address Golden State residents regarding propositions currently on the ballot.  But I recommend that you read ahead regardless, as the subject of eminent domain is sure to be an issue across the country in the years to come.
Eminent domain is the right of governments to seize private property for "the public good."  The interpretation of what constitutes public good is what has been generating confrontations between government and property owners, and has sparked the creation of Props 98 and 99.
On it's face, "public good" has most often been considered the same as for "public use and benefit."  Many governments use this interpretation as their guideline for considering eminent domain actions and would only use the eminent domain process to provide for roads, schools, parks, libraries and other public facilities.   In recent years, however, cash-strapped governments in search of opportunities to create additional tax revenue have broadened this interpretation to include "to increase government revenue."  Numerous examples exist in which governments, at the county and city level, have seized private property under eminent domain only to either lease or sell it to private businesses that would pay higher taxes than the previous private owner.  This increase in tax income is interpreted to be for the public good, since it will be used to fund public services.  In most cases, however, the private-to-private transfer or use of seized property is nothing more than politicians covering up for poor fiscal policy or simply providing campaign contributors with land they could not buy themselves.
Proposition 98, if passed, will require that seized property be used for public purposes, not private.  Proposition 99 is a sham to confuse voters and get them to either not vote on the issue or to unwittingly vote against protection of their property.  In recent years the tactic of creating a competing proposition to confuse voters has appeared in almost every election.
Don't be fooled - read Proposition 98 for yourself.  The truth is that it protects private property from being seized for use by other private parties.  Don't let the television ads, paid for by developers friendly to corrupt politicians, confuse you.  Vote YES for Proposition 98, vote NO for Proposition 99.


Looking outside your neighborhood.   (May 19, 2008)
  
Some real estate investors subscribe to the philosophy that they don't buy property they can't drive to within an hour.  While this is understandable if the owner is also the manager or maintenance man, it is a limiting factor when it comes to finding good investments.
If the market is down in your area, are you willing to take an investing holiday while you wait for it to come back?  You shouldn't have to.
As I mentioned in last week's blog, there are income properties that require no maintenance and provide reliable, steady profits, such as land leases.  There are also properties, such as multi-family, that can be kept running by on-site managers.  Investors who want to remain active during flat or down conditions in their home market should consider these types of properties outside an hour's drive.


In defense of diversifying your real estate porfolio.   (May 12, 2008)
  
Whether it's real estate or money, a common piece of advise is to diversify your investments.  Some real estate advisors will steer you towards one type of property, such as single family homes or condos.  Usually a property THEY know well or have a large inventory to sell.  As readers of my blog and my clients know, I don't recommend single family homes or condos as investments unless they are located in vacation areas where demand increases and rents are always high regardless what happens to the usual long-term rental markets.  But I don't recommend just these properties.  For investors with the means and the desire to grow value in any market, here are a few other options.
 - Land lease properties:  These are pieces of land that you own and rent to gas station operators, retail stores, and other businesses that will build and maintain a structure on the property, pay the property taxes, and insure the property.  The advantage of land leases is that you have no property maintenance headaches, leases typically span 5 or more years, and companies that lease these types of properties are stable and make their lease payments on time.  Since there is no structure to maintain or inspect, you don't need to buy land lease properties near you, they can be located anywhere.
 - Single-tenant commercial properties:  These are properties typically seen in parking lots of strip malls or along busy streets.  They are often fast food restaurants, video stores, or retail outlets.  They are usually operated by chain or franchise organizations, though they could also be rented by mom-and-pop single location businesses.  Unlike land lease properties, a structure is located on the property, usually that the business operator remodels to fit their type of business and image.  The advantage of these properties is that leases are typically 10 years or longer, include rent escalation clauses, and most of these properties are leased by stable businesses that maintain the property themselves.
 - Triple net office, commercial, industrial or mixed-use properties:  Triple net (NNN) means that tenants pay rent for their space plus a monthly assessment that covers all the other operating costs of the property, including taxes, insurance, common area repairs, cleaning, grounds maintenance, etc.
These are just a few of the properties that I recommend to balance risk, income potential and long term growth of your investment in real estate.  For a no-cost consultation regarding strategies for diversifying your real estate investment portfolio, give me a call.

Why real estate agents didn't show foreclosure properties to investors - until now.   (May 5, 2008)
  
Real estate agents are in the business of helping clients buy and sell property.  Why, then, have agents not been showing their investor clients foreclosure properties that could be picked up for a song?  Must have been a really, really good reason.
It was.  Per the Home Equity Sales Act (Civil Code 1695.17), agents could not broker deals on California residential foreclosure properties for their investor clients unless the agent purchased a surety bond.  Problem was, no bond companies sell surety bonds in California for these transactions.  They still don't.  However, a recent court ruling determined that the bond requirement wasn't right and agents are now free to sell these properties to investors.
The court ruling came about when the seller of a foreclosure property sued to regain his property (void the sale) because the buyer's agent had not obtained a bond.  The trial court ruled in the seller's favor, but an appeals court sided with the buyer.  The California Supreme Court refused to review the case, making the ruling of the appeals court the final word on the subject.  The other provisions of the Home Equity Sales Act are still in force, but agents are now free to support these deals.
Want to know more about buying foreclosure properties as investments?  Drop me a line.
 


Don't put lipstick on that pig.  Trade it for a stallion. (April 21, 2008)
  
It's a common instruction to stock brokers from their managers: "let's put lipstick on this pig and get it out the door."  Translation?  "This is not a great investment, but let's find a way to sell it anyway."
In real estate, we often look at investment property and have to decide - is it a pig?
Lack of maintenance, unrealistic rents, and bad management can contribute to adding a pug nose and curly tail to a property that at one time was a cash cow.  But nothing does more to create a pig property than location.
It's not unusual for investors to purchase a good property and take excellent care of it while the neighborhood around the property goes into decline.  The owner of such a property will work hard to make improvements and add value, but overcoming the loss of value in the neighborhood is usually an impossible task.
So, what are the options?  Realistically, there are only two: 1) Wait out the decline in hope that the neighbhorhood will some day turn around, or 2) Trade the pig for a stallion - a  good property in a neighborhood that is either stable or increasing in value.
My recommendation is to track the markets where you own investment property and don't be afraid to admit that long term decline is a possibility.  Before the value of your asset is eroded too far, consider trading for a property in a neighborhood that will support the level of profit you want from your equity.  Don't be afraid to call a pig a pig and move your equity to a stallion.


It's Time To Stop Blaming The Mortgage Brokers (April 7, 2008)
 
"In war, the first casualty is always the truth."  In the search for a villain in the subprime (and prime) mortgage crisis, this statement regarding the truth readily applies.  Yes, there are mortgage brokers who have signed borrowers to inappropriate loans, have falsified loan applications, and have commited other acts that would (and should) make them liable for civil and criminal penalties.  But these bad eggs have always been in the market and have accounted for only a minor portion of the losses by banks and consumers.  The truth, however, is that for the most part mortgage brokers are hesitant to commit acts that might lead to losing their license, subject them to criminal prosecution, and make them liable to pay huge fines and restitution.
So, we're back to the original question: who to blame?  In many cases, it's the banks that offer the loans that the brokers sell that have created the mess they are in.  Let's look at a few facts:
 - Underwriting guidelines (qualifying factors) are developed by the bank, not the broker
 - Actual underwriting (review and acceptance ) of loans is done by the bank's underwriter, not the broker
 - Banks were the ones who came up with "stated income", the qualifying parameter that allows borrowers to lie about their income while providing no backup documentation
 - Banks were the ones that developed risky loan products (such as pay option ARMs) that made the banks lots of money and led them to offer double and triple compensation to brokers who could sell the loan
Should brokers have known not to be tempted by the apple of greed hanging so low on the tree of temptation?  Of course.  There is never an excuse to harm a borrower or expose a bank to unacceptable risk of capital.  But there is also a reasonable expectation that when offered bloated compensation and bombarded with constant bank marketing aggressively pushing risky loan products, some brokers (and many, many bank loan officers) will place borrowers with these risky loans.
There's plenty of blame to go around - let's not heap it all on the just the mortgage brokers.


Why I Don't Like Condos (March 31, 2008)

Clients who have worked with me for a few years know that I advise against investing in individual condos.  OK - I do like condos in premium locations, such as on the beach in Hawaii, San Diego, Santa Cruz, etc.  But in general, I don't like condos because when markets get soft they are the type of property that loses value first and they are the last to increase in value when markets improve.  They seldom pencil out with any kind of measurement you use.
Some buy condos to offer as vacation (short term) rentals so that they can use them when the property isn't rented, and that's OK, too, as long as you don't violate the 10% or 14 day rule the IRS imposes.  What's the 10% or 14 day rule?  The IRS states that, in some instances, the owner can't use a rental property for personal use more than 10% of the days it is offered to the market for rent, or a maximum of 14 days per year.  This is something you have to discuss with your tax guy or gal to see how it specifically applies to your property.
Regardless - my usual guidance is still this:  buy units (apartments) or commercial property for cash flow, buy houses and condos to flip.  I don't like condos, but in an up market you can still make a few bucks with them.  Please call me before you buy and let's run the numbers.



Using "Ten By Ten" To Help Define Your Market (March 17, 2008)
 
In politics, they say "all politics is local."
In real estate, they say "location, location, location."
When it comes to identifying your local rental market, I say "ten by ten."
What is Ten By Ten?  It's this:  in most geographic markets, neighborhoods are roughly ten blocks deep and ten blocks wide in size (ten by ten).  Look at a plat map for the neighborhood in which your rental property lies.  If you study the natural boundaries (rivers, hills, canyons) and man-made boundaries (major roads, freeways) that define the neighborhood, you will often find that the neighborhood is roughly ten blocks wide and ten blocks deep.
There is no specific size for a block - it is a rough measurement.  The important thing is that you establish the boundaries of the neighborhood in which your rental property is competing against similar properties so that you can define it's market position and complete an accurate market rent survey and analysis.
Neighborhoods are often desirable because they are served by good schools, nearby shopping and employment opportunities, and because pride of ownership is evident when traveling through the neighborhood's residential streets.  A quality neighborhood has a sense of pride and unity that creates higher demand for housing, both purchased and rented.  Understanding the selling points of the neighborhood and the geographic boundaries will help you compete more successfully as a rental property operator.  When clear neighborhood boundaries aren't available, try using the ten by ten guideline and see if it helps with your market analysis.

Take A Niche-Defining Inventory Of Your Rental Property (March 10, 2008)
 
The quality and quantity of comparable rental property in your neighborhood determine both the rent you can charge and the level of quality that must be maintained to stay competitive.  Many apartment owners "fly by the seat of their pants" when it comes to maintaining market leadership.  I recommend that you take a written inventory of your property to determine the property market position and what you need to do to be the most desirable property in the neighborhood for the price.
First, define what you believe is your market position based upon overall quality and price.
Start your inventory by creating the property features you will review.  This should be easy - square footage per comparable unit, view, security, parking, storage, pool/spa, laundry, appliances, etc.
Then, do an honest on-site inspection and rate the availability and quality of each feature.
Next, do your homework on competing properties in the neighborhood.
Finally, compare your property to the competition.  Does your property meet the niche definition you started with?  If not, what changes are required to regain the market leadership that brings in the highest rents for your niche?  Conducting a written inventory will help you get started.

Is It Time To Buy? (March 3, 2008)
 
The first rule of investing: "buy low, sell high."  Today's question is: "have we hit bottom?"  While many investors are on the sidelines waiting for signs that prices will begin to rise, some are using their cash to buy properties that have experienced 10% or more reductions in value, plus foreclosures and distressed properties picked up for 20% to 50% below their value last year.  If you're waiting for prices to start going up, you may have to wait awhile.  If you want to find deals, this may be the best market to add properties to your portfolio at bargain prices.

Real Estate and General Economic Recessions Go Hand-In-Hand (February 25, 2008)
 
Realtors are always asking - "when will the housing market rebound?"  The simple answer is that houses will start selling again when people can afford to buy them.  Right now, the median income household can't afford the median priced home.  For the housing market to rebound, either home prices have to go down, wages have to go up, or both.  Since most sellers bought high with little down payment and buyers are nervous about committing to a big mortgage while the economy is in recession, it is unlikely that housing sales will rebound in the near future.  What many on the TV news neglect to say is that recessions are a normal economical occurrence.  After each boom time there is a cooling off period when prices stabilize or pull back a little.  These periods provide the contrast to know when the market is going up again.  No one can predict for certain when the recession will ease, but when it does we can assume that the housing market will improve along with general economic conditions.

Higher Conforming Loan Limits - It's About Time (Feb. 18)
 
For years the federal government has refused to recognize the higher average home price in California and support it with a reasonable conforming loan limit.  For those unfamiliar with conforming limits and what they mean, let me explain.  The secondary mortgage market, made up of federally chartered organizations such as Ginnie Mae and Freddie Mac, buys mortgages from banks and other mortgage lenders.  The banks and lenders then go back to the consumer market and repeat the cycle of making the loan to the borrower and then selling the loan to the secondary market.  This provides what it is called "liquidity", or a steady flow of cash from the secondary market buyer through the bank to the consumer.  The conforming limit is the highest loan amount that the secondary market will buy.  If the loan amount exceeds the conforming loan limit (a "jumbo" loan), the bank can only sell it on private markets that require the loan to have a higher interest rate and usually higher fees.  The current conforming loan limit in California is $417,500.  The median house price in most California urban neighborhoods is $500,000 or more.  Since most buyers don't have the roughly 20% cash down payment required to buy a median home with a conforming loan limit, they are forced to apply for a jumbo loan at a higher interest rate or to use expensive second mortgage financing.  Congress is now considering a bill to raise the conforming loan limit to above $700,000.  This would create the opportunity for many home owners to refinance out of bad loans and for potential buyers to become home owners.  It would also create a flood of liquidity for banks and mortgage lenders, creating an increase in supply that would bring down mortgage interest rates.  It's about time.