04-02-11 - House rambling

There are a lot of short sales and a few foreclosures popping up in the area. (one of the houses we stopped by had a lovely sign saying "this house is the property of xx bank and if you enter you will be prosecuted"). Some of the short sales look like good deals, but everything I've read says to stay the fuck away from them. Apparently what's happening is neither the owner nor the banks really want to sell their short sales. While the short sale is listed, the owner can live their for free, so they don't actually want to sell. And, the banks would have to write down a loss if the sale went through, so they want to delay it to keep it off their books.

So, no short sales for me I think. Foreclosures might be okay though, dunno. I have seen a few places that are cheap enough that I believe you could buy them and immediately have positive cash flow from rent, which is where you want to be with real estate investing. (mainly places that have "Mother in Law" units because you get two rents; I can't believe how much those things rent for; the one in my house is rented out for $850 and it's an absolute hole). (you wouldn't actually be cash+ because that's not counting property tax or upkeep or months when it's not rented, etc, etc, but then it's also not counting appreciation; in any case rent = mortgage is a rough sign of price sanity, or maybe just a sign that rents are awfully high around here).

There are houses in the Beacon Hill area that are under $200k. I could buy that outright and have no mortgage! My depression-era financial mentality finds that rather appealing, but it's really bad investment. One of the biggest advantages that houses have as an investment vehicle is leverage (the other of course is tax benefits) (and another is that the market for houses is actually propped up by the government, they actually subsidize your risk).

My understanding on fees is that the 6% is usually locked into the seller's contract, then they give 3% to the buyer's agent. This is an obviously illegal way of making you take a buyer's agent.

One option is to use Redfin, which gives you back half their fee (1.5% back). On a 500k house that's 7500, so it's not trivial, but maybe a good buyer's agent would save you 7500 worth of time and haggling and fixes on the house, so it's not a clear win. I've read good and bad things about buying through Redfin. It seems like sort of a shoddy operation, but I do like doing things online and I hate talking to humans, so that aspect is right up my alley.

The advantage of Redfin is that they will at least make appointments for seeing houses and take you around, so you don't have to call up agents. There's another one here called "$500 Realty" which gives you back 75% of the 3%, but they literally do nothing, you have to do all the touring yourself.

On top of the 6% real estate agent fee you get various closing costs which I understand are 3-5% typically. WTF WTF. 10% in fees on this transaction. This is such a fucking scam.

And I was thinking about mortgages a bit. Obviously fixed rate is the way to go right now to lock in the low interest rates. I'm kind of tempted by 15-year mortgages because I like the idea of paying it off (depression era youth, there you are again!), but I'm pretty sure the 30 year is actually a better deal. For one thing, the spread between 15 and 30 is very small right now; apparently sometimes the spread is much bigger and that makes more of a case for the 15. If you look at the total amount of payment difference, it looks like a big difference (almost twice as much), but that's a lie. You have to account for inflation - the dollars paid after the first 15 years are worth *way* less, and you have to account for investment income on all the dollars you didn't put towards the mortgage, and you have to count the larger tax deduction with the 30 year, and I believe the result of all that is a decent positive on the side of the 30 year. One thing I spotted that I wasn't aware of is pre-payment penalties. WTF, you fucking scammers. So, have to watch out for that.

I dunno.


Justin Paver said...

A note on the importance of timing. In a declining market, the average sales price is typically below average listing price for purely psychological reasons. As soon as the market is perceived to have flipped, the sales price tends to be above the listing price. The gap between buyers market and sellers market is a huge investment potential, and can easily be 10-15% of the property price. Exact percentage obviously varies based on location, property type etc.

cbloom said...

Can you see the future? I think it's possible Seattle will be near bottom this year, but it's impossible to say.

With stocks, I believe in dollar-cost-averaging. With houses, you're fucked because you have to make one single huge purchase at a single point in time.

I dunno. I sort of think that thinking of the house you will live in as an investment is a mistake (wrst life quality).

kim said...

Agent fees on both sides are such a sham. The obvious incentive for both buyer/seller agents is to get to closure as fast as possible.

Better for seller agent to convince seller to drop price by 20% and earn, say, $16k in a few days than to earn $20k but have the house sit for months on the market.

Buyer agent has this same incentive PLUS if you are convinced to bid higher, their commission goes up AND they get it for less work.

Better deal would be for each to have a structure that gives them incentive to act in your interest. E.g. Seller agent has a flat fee plus commission, and that commission is, say, 10% of every dollar over $500k floor price.

The whole system is such a sham. I like that redfin and others are using the net to shake it up a bit, but they quickly get dragged into their own flavor of bilking people out of too much for too little work.

Justin Paver said...

No, I can't see the future, but I can see the gap (http://www.redfin.com/city/16163/WA/Seattle). I wouldn't track Seattle as an average, but try get data on sub-regions where there'll be local variance. But alright, I'll disclaim this. Speculation is not without its risks, you can get raped on the transaction fees, don't take what anyone says as gospel etc.

There can be mitigating factors if you make the right choices and choices must be informed by data. eg.

1] Turnarounds in housing sector may be telegraphed by gains in other sectors. Manufacturing, Jobs, services etc. eg. in expansion-constrained areas like the San Francisco peninsula. An uptick in currently depressed jobs in the bay area can cause local demand in parts of that area.
2] gentrification & subsequent increases in value can be guestimated/predicted based on announcements/plans for urban development etc.

There are many indicators that can form a valid basis for speculation, but with any investment you're taking a risk that your information is accurate and not subject to extreme change after you've committed to it. Basically it's almost always gambling and you have to recognize and play the odds. Recognizing that most investment markets are cyclical have the potential to pay off if you have the cash to hold in an investment. ie. hold long enough and eventually the cycle can reach a local maximum that exceeds your stake.

Your point on dollar-cost-average is basically the point I was trying to make, albeit a lot more eloquently than I was able to express. :)

When averaging, you're protected to some degree from the effects of timing. However with stock you dilute your profit by paying tax (capital gains or LTCG) on the profit of every sale of stock.

I'd agree that thinking of the house that you live in as an investment could be a mistake, and things like HOA/maintenance costs can bias things that way. However, there are mitigating factors that can come into play if you've made the right choices:

1] For some combination of interest rates & classes of property, mortgage interest & property taxes being deductible can easily allow you to pay less than if you'd had to rent a similar property.
2] The fixed mortgage stays fixed while the rental price will increase under inflation.
3] you have the flexibility to change your home - put hot items on your counter or cut into that butcher block counter top, paint, hammer nails into walls, plant that garden etc. without getting raped on the rental deposit.
4] Currently, when you sell after 2 years of being in your primary residence you can exclude up to $250k(single) or $500k(married) of your profit from that sale, or rent out the property for a period and roll it into a section 1031. These strategies are not available when trading stock.

We'll see if any of this is still relevant after the budget & government shutdown scare is over. Legislation is, sometimes unfortunately, subject to change :)

cbloom said...

OMG I just wrote a huge reply and then Blogger said

"We're sorry, but we were unable to complete your request"

and lost my text.


Justin Paver said...

Ugh. The same thing happened to me with my lengthy post. Luckily the back button worked for me and preserved the text box contents.

old rants