Category Archives: Real Estate

Sweeping Changes to Closing Process Taking Place August 1st

Man's Hands Signing Document

 

Real estate is in a constant state of flux. With advances in technology, industry changes can happen faster than they ever did before. Such changes are happening again in real estate.

The Voice of Real Estate, an industry news reporting arm of the National Association of Realtors announced sweeping changes brought about by the Consumer Financial Protection Bureau that will affect the closing process nationwide. These changes include the retirement of the HUD-1 closing statement, the Good Faith Estimate, and Truth In Lending. They will be replaced by two new forms: the Loan Estimate and the Closing Disclosure. All paperwork must be finalized no later than 3 days prior to closing. If last minute changes are made, it could trigger the three-days to start over again.

Also covered in this latest news piece:

  • New proposed rules concerning the use of drones in real estate
  • Foreign investors increasingly interested in American commercial real estate

 

“Low-Ballers” or Prudent Investors; a stark matter of perspective

lowballers

 

More often than not, there is a great expectation by eager sellers who would seek to maximize their net sale proceeds. For owners of well-maintained properties–who have invested faithfully in the upkeep and ongoing maintenance of their properties—they are justified in seeking and obtaining the highest possible net proceeds.  However, when it comes to the investment value of properties that require a lot of work and capital investment, most sellers expect too much.  I believe the reason is because most sellers are left uninformed about the way an investor buys properties. It may be that such sellers hope to find a handyman type buyer who intends to live in the house, and who is typically not so concerned about immediate resale value. While these buyers are out there, they are not as plentiful as the investor community at large; most investors acquire real estate to earn a profit, and they must do so while balancing the cost of capital. It is due to these factors that an investor must offer what makes most financial sense for them to engage in a real estate investment opportunity.

Here is an example:

Let’s say that MLS sales statistics for the past 6 months indicate that remodeled properties are selling in a certain area for an average of $105.26 per square foot; and within this area is a property that is 1,292 square feet. It would seem practical that a buyer would expect to pay $135,996.00 for the property, if the property is in remodeled condition.  However, the property in our example is a fixer, and the seller of this property has it listed for $159,000.00; which is a far above the $135,996.00 we calculated based on historical sales data from the MLS, and it does not take into account the $30,000.00 to $40,000.00 (or more) investment of capital it will take to bring the property up to a remodeled condition.

The Ideal Investment Scenario

The ideal—as many real estate investors learn —is the 70% Rule where an investor makes it a goal to acquire properties at 70% of after-repair value minus rehab costs.  While the 70% Rule is always a good goal, it is not always possible. A lot depends on market conditions. With that said, an investor must justify the use–and cost–of capital, or they will be investing only for the pleasure of investing.

When it comes to acquiring fixers, sellers should be more realistic in their expectations.  Instead of overpricing their property, they should place more focus on seeking a middle ground. When both sides are aware and considerate towards what the other side needs, a fair deal has a chance to materialize.

The Balance between Risk and Return

A house remodel requires an investment of capital; the use of that capital comes with a cost, and those costs must be taken into consideration when calculating offers. The resulting number is the amount an investor can pay for a particular property. It not only takes into account the cost of capital, but it also factors in the level of risk assumed by taking over the property. Prudent investors will not take on an investment where the risks and cost of capital cannot be justified by a decent rate of return.

I believe the growing stigma against MLS listed properties could be lifted a great deal,  if only sellers would realize how investors actually see their properties; especially, fixers that are in need of a lot of rehab work.  It is a realization that could mean the difference between a property that sells quickly for a mutually fair price, and a property that sits on the market unsold because it was overpriced to begin with.

Investment Real Estate Perspective | Assessing and Mitigating Risks

Risk-Management-Cycle

 

“Perhaps the best strategy for dealing with distressed properties is to forestall them by watching for early warning signals. The difficulties of most problem properties usually can be traced to one of the following factors: poor management, operating deficits, lack of capital improvements, or owners who need greater liquidity. Sometimes the problems are physical–deterioration of interiors and exteriors, problem tenants, neighborhood deterioration, functional obsolescence, adverse changes to frontage, increased traffic congestion, or worsened access in and out of the property…Fixing these problems before they become major obstacles can save everyone a lot of grief. It helps the equity investor because he or she may be able to avoid foreclosure. Working hard to turn around a property may also allow the equity investor to borrow again another day” (Shilling, 2002, p. 190 – 191).

Assessing Risk is an Important Part of Conducting Due Diligence

We are having a very interesting class discussion regarding assessing and mitigating the risks that surround real estate investing. A very important point was made that an assessment of risk should be conducted as part of the due diligence process. As cited above, the best way to avoid becoming a distressed statistic is to take preemptive and preventative measures; for example, establishing quality management, ensuring that cash flow is sufficient to cover expenses and yield a positive return, establishing and maintaining reserves for capital improvements and maintaining greater liquidity, etc. These are all things that are within an investors’ control; however, there are some factors that go beyond the control of an investor; for example functional obsolescence and neighborhood deterioration. These uncontrollable factors will have a direct and significant impact on the quality of tenants, and thus quality of the investment; which in turn raises the risk of the cash flows and risk of the investment in the long-term.

The Greater the Risk, The Greater the Expectation of a Return

For the average real estate investor, these conditions are best uncovered during the due diligence period and avoided. However, for an experienced investor with vision, resources, local knowledge, and community backing, there could be a tremendous opportunity to re-develop deteriorating communities; to be sure, it is a specialty not for the faint of heart. In the case of deteriorating neighborhoods, these investors are buying up whole blocks of homes for pennies on the dollar, eradicating the neighborhood of criminal element, demolishing old vacant homes, and then re-developing / re-building clean affordable homes and rentals. When the market recovers, their hard work will have paid off handsomely, because they properly assessed the risks, created a preemptive plan of action, and followed through with all things considered. Since they assume a greater level of risk, they can expect to earn greater returns, and rightly so.  These investors are angels–in my opinion–because they are the ones that revitalize and renew ailing neighborhoods; they encompass what it means to be “green” in the quest for sustainability and the triple bottom line of, “people, planet, and profit.”  These Angels have my undying respect and admiration for the good that they do for people in their pursuit of profit; they are social entrepreneurs to the core. Spectacular!

REITs Ramping Up Development

After peaking in the fourth quarter of 2007, new construction in the REIT industry decreased sharply over the next two and half years. Steven Marks, managing director with Fitch Ratings, attributes that decrease to a demand slowdown coupled with REITs desire to preserve liquidity and reduce leverage. Although it has been slow and primarily concentrated in the multifamily and industrial sectors, Marks says sees the growth as a signal that REITs are organically building their portfolios.

via REITs Ramping Up Development.

Viewing Properties – How real estate investors differ from home buyers and why they differ

 

 

In the single-family home buyers market, a buyer looks for homes in areas where they want to live. They line up an agent, gather a list of properties, and then make an offer after viewing properties and picking out the best one. For a real estate investor, the perspective and approach is different. Why? Because, a real estate investor has to be more prudent with the use of their time and money, or they could quickly find themselves out of business. This is especially true for investors that have to look outside of their home states for real estate opportunities that pencil out and make sense to them.

For example…

Over the past day or so, I found myself having a very interesting exchange with a listing agent about an offer made on one of his apartment listings.  Aside from the earnest money and the due diligence period, which would have been easy to work out, the listing agent said that his seller would have had a problem with the fact that we had submitted the letter of intent without making a personal visit to the property first, which would have required an upfront cost of airfare, hotel, etc…all without the property being contractually secured.  While I realize that some buyers might make it a common practice to jet set all over the united states in search of properties, in reality, this approach is a risky and unwise practice. Here’s why:

A buyer could be wasting their time and money.

1. During a visit to the property, the seller could sign a contract around with another buyer

2. After visiting a property, a buyer might discover that they are dealing with an unreasonable seller

3. Doing business this way would waste a significant amount of time and money

4. Waste enough time and money, and a buyers’ business will eventually find itself driven into the ground with nothing to show for it