Monthly Archives: July 2011

Housing is Still Seeking a Bottom

The housing market is still sputtering along.  Here is the latest:

  • Case-Shiller index down 4.5%
  • Availability of credit continues to drop
  • High unemployment – job growth was nearly flat in June
  • Psychology – people continue to “hold out” for lower prices

The video below shows the enourmous headwinds that housing prices face when they recover from a bubble. In the past, prices “overshoot” from an extreme high to an extreme low. It will take years for population growth to soak up the excess inventory.

Video Link:

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Leverage is Your Friend Given that the Finance Industry is Returning to Normal

A smaller down payment and a loan sounds threatening, right? Not necessarily, as you are going to discover. The last boom-and-bust cycle was unmatched in the history of residential real estate. Within a typical market, leveraging is an excellent thing, particularly if you are a real estate investor.

By using leverage, you may build a large return on your investment. This is due to the fact that you have much less money tied up initially. If you purchase an investment for only twenty percent down, you’ll be able to possess a great deal of value.

In today’s market, there are numerous regions where it’s much cheaper to purchase rather than lease. In many of these places, it’s actually not unheard of to discover people getting more than 20% yield on cash flow alone. Throughout the bubble years, the opposite was the case. If you obtained a rental property as an investment during this period, then you know upfront that the rents you were paid failed to even take care of the loan payment. You needed to “feed” the property every month since you didn’t receive enough revenue to pay all the costs.

When it is less expensive to buy than to lease, there’s something wrong with the current market. Down financial markets are wonderful possibilities with regard to investors since the slow market will work to your advantage. In the present environment, lots of individuals are not able to get financing or have zero dollars for a down payment. Therefore, investors step up to help make up for them.

Purchasing real estate is an effective hedge against long-term inflation. In the long run, the real value of all paper currencies will proceed to depreciate while real estate will maintain real value in real terms. Right now, we’ve got very low interest rates that offer the opportunity to secure a lower rate. When inflation goes up, and it eventually will, you can raise rents while repaying the loan with cheaper money.

Also, does this imply that real estate investing is easy or that you should try to buy without a down payment? Definitely not! A 20% down payment is now an absolute minimum unless you locate a seller that’s willing to carry the note. In fact, too much leverage can be dangerous as many of us have discovered. You should aim for at least a five percent return on cash prior to investing. This consists of all obligations connected with the asset. A lot of inexperienced buyers leave out vital expenditures including vacancy loss and routine maintenance. You must think about all obligations. When you run the numbers, you’ll find that a bigger capital investment can often be necessary to clear the 5% cash flow yield benchmark.

In conclusion, you should utilize leveraging to your advantage. Nonetheless, you need to be practical and cautious about it. It’s also wise to reduce your risk by making sure that you will have favorable profit from leasing the property.

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Housing Becoming an Attractive Long-Term Buy

In many areas, the costs associated with buying have now become cheaper than renting. Some places, notably Las Vegas, still have a ways to go before the market reaches a bottom. This is because there is still a considerable shadow inventory and many homeowners that are underwater. Video Link:

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Negotiating Strategy for Buying and Selling Real Estate

Negotiation is a critical element when purchasing a property. Most of the time, the negotiation process in asymmetric. In the current environment, this is not always the case because banks own a large portion of the properties. Therefore, they don’t have the advantage that a traditional seller would have. Great negotiation techniques will not always give you a huge advantage because the market sets the general direction of prices.

For instance, if you bought a house in 2006 and successfully haggled the price down below the market, chances are you still got a rotten deal! You are just a few thousand dollars less upside down than people who bought similar properties.

If you are a great negotiator, don’t brag about it. If the person you’re dealing with finds out, then they will either avoid you or tighten up. Billy Beane, the general manager of the Oakland Athletics, was featured in Moneyball, written by Michael Lewis. He eventually got a reputation for drafting the most productive players and acquiring more value through trades. Once other general managers became aware that he was so savvy, they started avoiding him. This was amplified when Moneyball was published. This is not to mention the fact that richer teams eventually copied his strategy.

If you are a small investor in a big market, chances are that you’ll never have to worry about your advantage becoming known. If you are the richest investor in a small community, then people will definitely pay attention to you. As a negotiator, the best reputation is no reputation. Don’t make ridiculous, low-ball offers. Also, when someone counters with a reasonable offer, then you should also do the same. The price you’re willing to settle for should be below your asking price anyway if you’re the seller.

Remember, your property is not worth more just because it’s yours. When you are the buyer, this is something you constantly experience. The market data exists for a reason.

It is critical that you have done your homework prior to the negotiation. When selling, you should know exactly what price you would settle for and aim to get a higher price. If you are the buyer, you should submit an offer that is reasonable but less that what you would be willing to pay. If your opponent cannot come to an acceptable agreement, then simply move on. Do not go past your limits. Just go find a better deal. Having a plan before you make an offer or list a property for sale will save you.

Auctions exist for a specific reason: to obtain the highest possible price. In an auction, there are individuals that don’t have the discipline to “stick to their guns”. They get amped over the rising prices. If a price moves past your reserve when your trying to buy a property at an auction, then resist the urge to raise your bid (even if it’s just a little bit more). As a side note, think about this the next time you are buying a car from the dealership. Ask yourself, why is the auto retail business designed the way it is? Why not just have a sticker price just like Wal-Mart and pay that price? If the dealer can’t sell cars fast enough, then adjust the price. The reason is simple: to get you to say yes and pay too much!

Using this car dealership example, take special notice when they will say that the deal will only exist for right now. This is, in actuality, never the case. The same is true for real estate. If you’re not satisfied with the current negotiation, than just walk away. There is always another deal.

In addition, don’t be too focused on price while you’re conceding on terms. Returning to the automobile example one last time, recall the number of times that the dealership was willing to concede on one item to make up for another. “Sure we’ll get you that price, but we can only give you $3,000 for the car you’re trading in.” These types of deals can cause you to accept something that is clearly not in your favor. Most times, this tactic involves the dealership selling the car for an X dollars a month payment. In reality, you end up paying more because they will extend the loan term for an extra year (or two) and it leaves room for a higher sticker price.

Finally, you must take an honest look at yourself. How well have you controlled your emotions in the past? How well were you able to treat each transaction, tenant, purchase, and sale as a business? Knowing yourself well is probably the best negotiation tactic when investing in real estate.

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