Real Estate Information Archive

1. Selection, selection, selection. There are about 57,000 resale homes on the market in Maricopa county(Phoenix). Regardless of the price range a buyer desires, there are plenty of houses from which to choose. Just a few years ago the resale inventory dropped below 5,000 units. A buyer was forced to make compromises if they were going to locate the home of their dreams. There is a great selection of attached homes, condos, and townhouses. You can find large lots, small lots, and a lot that will accommodate your boat or RV. There are lots of options in this market.
   
   
2. No Bidding Wars. In 2005 we had one client that made an offer on ten homes. They lost the first nine to the 'feeding frenzy' that existed. Other buyers bid the properties up substantially from the original listing price. There were escalation clauses where buyers authorized their agents to outbid other offers by thousands of dollars. There is no competitive bidding in this buyer's market.
   
   
3. You can make an offer. A few years ago when you made an offer, the only question was how high above the list price could the buyer reach in hopes of being the best offer on the table. Today the sell price list vs. price ration is about 96%. A seller will not be insulted if you 'make them an offer they can't refuse'.
   
   
4. Patience is tolerated. In the hot seller's market that existed everything was rushed. Find a house before other buyers did. Hurry up and make the offer.  Today a buyer can take their time. Look at several homes and think about your decision for a few hours.
   
   
5. Due diligence is welcomed. In this market a buyer is encouraged to obtain a home inspection, termite inspection, and appraisal. In 2005 many buyers waived these contingencies in order gain an advantage with multiple offers.
   
   
6. There are plenty of specs. In the not too distant past buyer had to 'play games' if they wanted a new home. There were lotteries and waiting lists in order to obtain new construction. Some buyers slept in their cars in order to get to the head of the lines. R.L. Brown estimates that builders have thousands of specs ready for immediate occupancy.
   
   
7. Repair requests are welcomed. After a buyer completes a home inspection, they are allowed to submit a repair request to the seller. In the past a seller might insist the home was sold 'as is'. Many times, there were back-up buyers waiting for a primary buyer to upset the seller whose home was increasing in value almost daily.
   
   
8. Few, if any investors. It is estimated that one third of all sales in 2005 were to investors. These non-owner occupied buyer caused the market to inflate and affordability to decline. Mortgage fraud became commonplace. It's a great time to buy without having to compete with hundreds of prospective landlords.
   
   
9. Location, location, location. Today's buyers can find homes closer to work. In the past buyers flocked to Maricopa and Queen Creek in order to find affordable homes. In this market, reasonably priced homes are within biking or walking distance to schools, rapid transit lines, and relatives.
   
   
10. Real Financing is available. The 'wink, wink' zero down, no doc, adjustable, sub-prime loans are gone. Fixed rates are back. FHA financing, first time homeowner bond programs, special loans for teachers, and police officers are back in business. It's a great time to buy real estate!

It's the mantra of the real estate industry, posted on yard signs everywhere: It's a great time to buy.

If you are in a financial position to do so, statistics continue to show the mantra is true.

The average home price in the Grand Rapids area last month was $147,148, a drop of 6.5 percent from September 2006. The average price year to date -- $152,742 -- represents a 4.4 percent drop from this time last year.

Part of that reduction is attributed to the laws of supply and demand.

While there are 8.5 percent more listings than this time last year, residential sales last month were down 6.7 percent from September 2006.

Jamie Starner, president of the Grand Rapids Association of Realtors, said he would like to see more sales, but a drop in the number of listings joining the market was promising.

Nearly 11,700 residential properties were on the market last month. Based on overall sales figures, that equates to more than a year's supply of homes for sale.

But the number of listings entering the market in September was more than 10 percent lower than last September.

"We've got to burn off some of that inventory that we have," Starner said. "We've got to get back to a balanced market."

Pat Vredevoogd, a real estate agent and president of the National Association of Realtors, believes the market is turning.

"I see this in a number of marketplaces, where that number of new listings is stagnating a little bit now, and the number of homes being put on the market is quieting down," she said. "We're also seeing quite a few more people out in the marketplace."

The market is taking its toll on real estate agents.

Membership in the association is down 9 percent from a year ago. And agents say they are working harder for the same or less money.

The decrease in the sale price means a decrease in my paycheck, because it's all based on commission," said Ethan , an agent with A local Realty Company. "I sold about six more units last year than I did in '05 and made the same amount of money."

But as a real estate investor, Ethan also is reaping the benefits of the lower prices. He bought four homes this year to add to his stock of rental houses. They included a property next door to one he already owned.

"I paid less for a neighboring house than my wife and I paid five years ago for the house next door," he said.

The average sale price also is affected by the prices of homes being sold. Sixty percent of homes sold last month were priced for less than $140,000. Last September, it was 54 percent.

Twenty-two percent of homes sold were priced between $140,000 and $200,000, and 18 percent were more than that, including three priced at more than $1 million.

RENTAL INCOME

Rental income is not as straightforward as it seems. Sometimes properties are under-rented and sometimes properties are over-rented, so be sure to find out the market rents when you consider a property. When we bought our first fourplex, we looked at comparable leases and realized our rents were too high, so instead of assuming we would continue to receive $3600 of rental income, we had to be realistic and assume it was more like $3200.

MORTGAGE INTEREST

A huge cost is mortgage interest. You should definitely sort out the details of your loan options and get an idea of current rates before running the numbers. It could make or break a deal. If you are getting a duplex or a house, the loans are generally similar to other home loan programs. Triplexes and fourplexes tend to have higher rates, and commercial is a whole other ballgame. One thing to consider is to put more down because the more you put down, the less your loan will be, which means less monthly interest to pay. Another consideration is the type of loan. We usually recommend people to get a fixed rate mortgage these days because the current ARM (adjustable rate mortgage) rates are not all that much lower than fixed rates.

Just get educated about the loan options and run the numbers with them. Oh, and do not just take advice from one mortgage person. The best way to get educated is to talk to a variety of mortgage brokers and banks to find your best solution; not all loan places have the same programs.

TAXES

People frequently use the taxes from the year when they purchased the property, assuming the taxes will stay the same. Taxes change every year. Taxes can go up drastically after a purchase. For example, an owner occupied property usually has tax breaks, so unless you intend to owner occupy too, your taxes will go up.

In addition, the county appraisal that your taxes are based on could go up after your purchase. For example, if you buy a property for 100,000 but the tax appraisal last year was for 50,000, don't count on it remaining at 50,000. In fact, I have seen cases where a year after a property was purchased the tax assessor increased the appraisal value to the purchase price. The safest approach is to look at the tax rate and the purchase price to determine your future taxes.

VACANCY COST

For some reason people tend to forget to take into account vacancy rate. Even when looking to invest in a desirable rental area, it's best to always take into account at least an 8-10% vacancy rate. Do some investigation, look at your market and find statistics on the average vacancy rate.

TENANT TURNOVER COST

We have personally found the biggest surprise to be the expense of tenant turnover. This includes advertising for a new tenant, cleaning, repainting, replacing carpet, etc. If you expect to have high tenant turnover, like next to a college campus, anticipate this to be a significant cost.

INSURANCE COST

Insurance on investment properties are typically higher than owner occupied, single family properties. So get an insurance quote on the property instead of basing your expected insurance off of the insurance bill for your house. You also should purchase liability insurance, which can be expensive.

MAINTENANCE COSTS

This is by far the most difficult number to estimate. It depends on the property, whether you fix some of the problems yourself or hire outside help, and random luck. So we can't give you a hard and fast number but we can look into different factors to take into account.

**Property Type - When you evaluate different properties remember to take into account the type of property. If it's brick you won't have to paint or worry about wood root. Decks need constant maintenance. A property with wood or concrete floors will be easier to clean and will not have to be replaced when a tenant moves out. Just think about the aspects of the property and their maintenance costs.

**Property Size - A smaller property is easier to maintain than a larger property. For instance, say there are two properties for sale for 200,000 and each have a combined rent of 2000. A property with 2 units and a total of 1000 square feet will be cheaper to maintain than a property with 6 units and 3000 square feet. The larger property will be more expensive to maintain when you are replacing the larger roof, painting the interior walls etc. More units mean more money spent on advertising, make-readies, and more appliances to repair.

**Property Location - Consider your proximity to the property. If you buy a property 30 miles away, over the course of a year you can spend a decent amount of gas money driving back and forth.

**Your personal management style - How often will you do maintenance work yourself vs. hiring help? For instance, when a unit needs painting will you paint the rooms or hire a painter? Hiring professionals is definitely more expensive, but you have to be realistic about how much you will personally do, especially if you are looking at many units.

UTILITY COSTS

Be sure to check what the tenants pay for and what the owner pays for. This includes all the utilities and lawn maintenance. In addition, there may be owner expenses like parking lot lights and trash bin service.

PROPERTY MANAGEMENT COSTS

If you are going to hire a property management company, definitely get their rates. We personally choose properties that we can manage ourselves.

SUMMING THE NUMBERS

We wrote a investment property calculator which is located here Investment real estate calculator. Once you add all the numbers up, you often find the property has 0 cash flow or even negative cash flow. This doesn't necessarily mean you should not purchase the property. There are positive tax benefits to rental properties and depending on your situation, a property with technically 0 cash flow could still put more money in your pocket due to tax benefits. If you think the property is going to appreciate in the future, a zero or negative cash flow property could still be appealing.