Austin’s “Affordability Crisis”

High prices mean more people, especially young people, are renting again. Pricedoutforever.com argues that this is a good thing. I’m not certain if its good for them, but it is a good thing for investors. Photo by Pricedoutforever.com

This post originally appeared on the Hermit Haus Redevelopment website on 2016-07-23.

The median price of a single family home in the City of Austin rose 3% to $350,000 in June. When you take the surrounding cities into account, the median price was up 8% to $295,000. This sounds like great news to investors, but it actually makes our game riskier. Just as the higher prices are denying many first-time home buyers and lower income families the opportunity to buy a home in Greater Austin, they make it harder for investors to find the margins we need to sustainably run our businesses. Not impossible, just harder.

If you talk to a real estate agent, they’ll say, “Buy high, sell higher.“ But remember agents are motivated by commissions, and they get paid no matter which way the market trends. They get paid more if it goes up, but they still get paid if it goes down, assuming it doesn’t collapse and they can still sell something.

The more people get priced out of the market, the fewer people there are to buy any given home. That doesn’t seem to be a problem yet—along with the "affordability crisis" the ABOR article mentions, we have a supply crisis. Our inventory levels remain at historical lows, less than two months. I’ve even heard speculation we may see a one month inventory in the near future. That means, despite the price, someone is buying all the houses that are for sale, and it’s not just investors.

Remember, a stable market has around six months of inventory. So we are still in a really hot market.

While the trend in median home price continues upward, it is not a straight line. You can’t count on appreciation to save your donkey. Data source: Austin Board of Realtors^®

But consider this: this business is cyclical, and it can turn on a dime. Add to that what our mentor Shenoah Grove says: "We’re currently eight years into a five year cycle," and you can begin to see why some investors are starting to talk about bubbles. And finally, I’ve seen a market correction in the first year of every new administration since I can remember, regardless of which party was involved. So you have to ask yourself if we are approaching the crest of the wave.

Over time, real estate has always appreciated. But that appreciation isn’t a straight line, unless your talking about the very long run. It’s downright bumpy. And as I’ve always said, to reap the long term benefits, you have to survive the short term. Or as I once heard Alan Greenspan quote John Maynard Keynes when asked why investors don’t plan for the long term, "In the long run, we’re all dead."

So how do we continue to help people and make money in times like these? We have to stick to basics.

• Don’t buy assuming appreciation will fix our mistakes. I think it will...in the long run—if we survive the short run.
• Know your end buyers well enough to improve the house to the right level, neither over improving nor under improving.
• Remember your time lines and try to eliminate slack from your schedules. This one is really hard right now when contractors and subs still have more work than they can handle. Why do should they care about your schedule?
• Manage your holding costs. Use private money rather than hard money. Use bank money rather than private money.
• Partner up to spread the risk. You only shoulder half the risk with a seasoned partner, but you only get half the profit.

That said, don’t forget the motto I learned from my mentor Than Merrill: “People first, profits second.“ This business revolves around solving other people’s problems. Even in these high-priced times, even when the market turns down, if you can help people solve their problems, this business will continue to be rewarding and profitable.

For the full report on the June market from the Austin Board of Realtors, see Austin-Round Rock home sales on pace to surpass 2015 record levels amidst affordability crisis

The Pros and Cons of Real Estate Wholesaling

When you have a property under contract, you have a marketable interest in that property: the contract. You can sell that contract in most states, but you can't sell the property until you own it. Talk to your lawyer.

I designed this infographic of the wholesale cycle way in the future. Too bad I don’t have it now.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-07-21.

Many "experts" recommend real estate wholesaling as a quick, inexpensive, and easy way into the business. While it may be the lease expensive way to start out, wholesaling isn't all that easy. For a complete explanation of what wholesaling is, see "What Is Real Estate Wholesaling?"

Pros

You can raise money fairly quickly.

Because you use very little of your own money and you collect on your investment quickly, it is possible to raise money very quickly. The amount of money you can raise depends primarily on your skill as a negotiator. How cheaply can you put the property under contract? How little of your money can you tie up in the process?

Risk is lower than renovating or buy and hold.

Again, because you use very little of your own money, you risk very little of your own money. But there are other risks.

Cons

It is not without risk.

Wholesaling can be very close to practicing real estate agency. You have to be very careful of your practices and wording to avoid this risk. Further, you will probably have at least a little of your own money at risk. And you risk your credibility with your peers if you don't perform a fair amount of due diligence before marketing your contract.

It takes a significant amount of effort.

Wholesaling requires more effort than just about any other kind of real estate investing and sales. It is a full-time marketing gig with very little repeat business. No seller will ever sell you more than one house. How would that sound? "Hey, Lee. You bought my house when it was being foreclosed on a few years ago. Guess what?"

You have to be willing to invest in marketing.

Because wholesaling is lead-driven, you have to generate a lot of leads for every deal that comes along. This part really isn't any different than other parts of the investing game, but it is something you have to be aware of. That means you have to be prepared to spend money and effort to generate those leads.

You can't do it on the MLS.

I see a lot of novice wholesalers trying to re-market a house they found on the Multiple Listing Service (MLS)—or from one of the big real estate sales websites like Realtor.com. The honest truth is, if it's on MLS, it's probably a very thin deal—usually too thin—for any investor already. By the time you add in a wholesaling fee, it probably isn't a deal any longer—if it ever was.

The point of this post isn't to try to scare you away from wholesaling. I want you to wholesale. We buy a good chunk of our deals from wholesalers. My business would be much smaller without reputable, reliable wholesalers.

The point is for you to understand what wholesaling is, what you're getting yourself into. You can make good money wholesaling, if you work at it and maintain good relationships with your buyers. But you will get much more out of it if you understand the needs of the people you buy from and figure out how to satisfy those needs.

How We Help Families in Probate

Being executor of a loved one's estate can feel like a weight dragging you down to the darkest depths below. [Hermit Haus] can help, even if it's only to listen. Image by Bitmoji

This post originally appeared on the Hermit Haus Redevelopment website on 2016-07-12.

Probate is one of those areas where emotions run high, and it's very difficult to determine the right thing to do. Many psychologists recommend not making any significant financial decisions for a year after the death of a loved one. That's good advice if you are in a position to follow it.

But what if you're not?

First, I want to be clear that I fully understand wanting to protect your family against opportunists who want to take advantage of your grief. There are plenty of those people out there, and I firmly believe taking advantage of a grieving family is a sure way to total your karma.

If your family has the resources to wait a year before making a decision, that's probably the best thing to do. If we can help answer any questions about the process, we will do so with no expectations. I was the executor of my father's estate, and that is a burden I wouldn't wish on anyone. It keeps you picking at the wound for however long it takes to settle the estate. In my case that was two years before I could begin to let the scab form.

Remember: emotional stamina is a finite resource—often more finite than money.

But if your family doesn't want the house, can't afford to keep it, or doesn't have the resources to get top dollar when you sell it, we can help there, too. We'll make a cash offer for the current value of the house and close at your family's convenience. If you're not looking for a quick sale, we have other ways to help.

The last thing we want to do is intrude on the grief process. But if you know someone who needs help or just free advice, call us. We've been there.

Open House: Ash

We added a few plants to the front walkway. I like how the colors pop against the gray brick.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-07-10.

We had our first open house at the Ash House today. Sue Ann promoted it on all our media outlets for a couple of days, but because I'm not the Social Media thinker, I forgot to mention it anywhere until it was over. Sigh!

Carol and I worked it, and we had a pretty good turnout that included a lot of our neighbors. One even followed Carol from where she put out the open house sign to the house! All of our neighbors were grateful for the project and seem genuinely enthused to help us sell it. This is one case where you really can pick your neighbor.

Another thing I love is Fredericksburg peaches. One of our neighbors gave us these to say thanks for fixing up the Ash House. I forgot to give Carol any. Wonder if there will be any left for the next meeting. Hmmm... Still life by Suna

We only had a couple of serious buyers, and one of them said the split level was a deal breaker. Even with only two steps, they were concerned about frailty and balance as they age. But they were really nice people who are looking to downsize and relocate to Temple. Carol may be able to help them with selling their home and finding the right place in Temple.

That’s one of the things I love about this business. You meet really interesting people if you take the time to learn their stories. There are so many ways to help others. Another thing is making the houses happy again. We had nothing but good comments on all of the selections. Preserving the character of this house instead of redeveloping it was the right choice. The most common comment was, "I can't believe how beautiful it is! Did you see it before?"

We learned that there is a fault line running through the neighborhood at the bottom of the hill. The neighbors all told us that the houses on top of the hill (like the Ash House) are fine, but all of the houses farther downhill have foundation problems because of the constantly shifting soil. I will have to understand the issue better and find a solution before we take on a project in the more mobile part of the neighborhood.

Finally, we also made a couple of good contacts. One of the neighbors is a probate attorney, and another buys furniture from estate sales. We find it rewarding to help families through the hurdles of probate and selling a house.

Almost Ready

The nearly completed renovation of the Ash House, narrated by Lee!

This post originally appeared on the Hermit Haus Redevelopment website on 2016-07-06.

The Ash House is almost (but not quite) ready for market. Here's a video that shows where we're at today. We're hoping to wrap up all of the annoying little details tomorrow.

We've put a lot of effort and money into this renovation. Because we were so taken by the original charm, our goal was to restore the house to what it once was and honor its architectural spirit, not to redevelop it into something new. Even so, here's what the new owner will get:

• A cleared and clean yard, but the bamboo we took down will continue to need maintenance for a while (This stuff is just hard to kill!)
• A new roof
• New energy-efficient windows and doors throughout
• New appliances, including the kitchen, water heater, and HVAC system
• New flooring throughout (except for the original brick)
• A luxurious soaking tub built by our granite contractor
• Custom shower in the guest bath

All of that will make for a wonderful home in one of the nicest areas of Temple, Texas. It's just a few miles from the medical center, shopping, and the country club.

I invite you to come see it for yourself next Sunday from 1-4PM CDT. You can find out all about the open house on the Facebook event page.

HUD Announces New Mortgage Buying Regulations

For more information about the effect of hedge funds buying mortgages, see Realtor.com and Hedge Fund Photo by Ken Tannenbaum/iStock via Realtor.com

This post originally appeared on the Hermit Haus Redevelopment website on 2016-07-01.

The Department of Housing and Urban Development (HUD) wants to reduce the number of delinquent mortgages sold to hedge funds and other major corporations, according to Bloomberg. To accomplish this objective, HUD has implemented new regulations that favor local governments and nonprofits. The goal is to help delinquent borrowers stay in their houses. The assumptions are:

• Private investors "rush" to foreclose to convert the properties to rentals or other more liquid assets.
• Nonprofits and local governments will be less likely to foreclose and more likely to keep current owners in their houses.

The "private investors" involved are usually not people (except under the erroneous definition of the "Citizens United" ruling). They are too-big-to-care banks and hedge funds that buy hundreds or thousands of troubled mortgages at a time. I know several private note buyers who operate legitimately and ethically. I would not want to tar them with the same brush as the corporate raiders.

People like us at Hermit Haus try help these distressed homeowners salvage what's left of their credit by buying their houses (sometime subject to the existing mortgage, sometimes not) before the house goes to foreclosure. We occasionally buy at foreclosure auctions, but by then the damage has been done, and it's down to the numbers.

Nonprofits and possibly local governments will probably be less likely to foreclose than the hedge funds. One question is can these institutions raise the money they need to accomplish HUD's goal. If they can't, the delinquent mortgages will be offered to the corporations a couple of months down the road. It would be good if they could take possession of title and use the houses to provide low- or moderate-income housing. The latter could bring needed capital into financially distressed areas.

The other question is what will keeping distressed buyers in their houses accomplish? Putting on my Nostradamus hat, I foresee four possibilities, depending on the reasons for the homeowners' distress:

• People who suffer from payment shock—having payments that go up because of the increased price of taxes, insurance, or interest (in adjustable rate mortgages) beyond their capability to pay—may be able to renegotiate their principle or interest rates to bring their payments down to something they can afford. I believe this will be good for the homeowners and the economy as a whole.
Heart makes this business rewarding. Money only makes it possible. We try to help good people in bad situations.
• People who get into trouble because of job loss or a healthcare crisis (which often results in the loss of a job and medical insurance) may be able to stay in their houses for a while longer, maybe even permanently as a result of a governmental or charitable purchase. Whether or not they would be able to afford to maintain their properties in a livable condition remains to be seen. Many of the houses we purchase are "unlivable" because the owners couldn't afford or perform upkeep. This results in people living in some truly horrid conditions. I've seen toilets that haven't worked in years. (You can't un-see that!) Whether or not this outcome would really be beneficial to the people involved and the economy depends on the actions of the charities and local governments. Will they be able step up to the additional costs of upkeep of an individual's home? In the case of local governments, will their constituents even allow them to do so?
• People who make bad financial decisions will continue to make them. Additional bad decisions may or may not lead to an eventual foreclosure. I talked to one person facing foreclosure who believed it would be possible to win a third set of concessions from their lender. It wasn't. In this case, the concessions only deferred the inevitable, and the person was well and truly surprised when the lender auctioned off their home.
• People who are gaming the system will continue to exploit that system. I've often said—so often that Sue Ann is tired of hearing it—that human beings can't invent a system that other human beings can't corrupt.

Now for the question many of you have been waiting for: how will these changes affect investors like Hermit Haus? I don't believe the will have any significant effect. Our business model is to intervene before foreclosure or to pick up the pieces afterward. We buy houses, not mortgages. When we buy houses from people facing foreclosure, we try to find creative ways to help them start over; we don't just put them on the street.

The truth remains, that if you can't afford your house, if you can't afford the upkeep on your house, if you're facing foreclosure or bankruptcy, we are likely to be your best option. Call us. We'll try to help.

The More It Changes…

Because of it must support the needs of real estate agents over buyers and sellers, Realtor.com may not become the self-service portal the market demands. Realtor.com screenshot 2016-06-29

This post originally appeared on the Hermit Haus Redevelopment website on 2016-06-29.

Ah, the more it changes

The more it stays the same

— Nostradamus via Al Stewart

I read “The Death of the MLS” by Bob Haywood this morning. It sounds scary doesn’t it? “The Death of the MLS”? Currently 80% of homes are sold through the Multiple Listing Service (MLS), according to the National Association of Realtors^® (NAR).

So how are we going to find and sell houses in a future without the MLS? Haywood suggests people will use self-service sites, specifically Zillow. While I agree with most of his prognostication, there are a couple of points I’d like to make:

• Zillow gets most of its data from the various MLS sites around the country.
• There are other sites that are as or more effective in helping buyers find properties (Trulia and Realtor.com, for example).

This trend to self-service brings investors both new opportunities and new risks, some of which are the same thing. I’d like to look at these, since Haywood speaks from the perspective of a Realtor.

A few percent pain in “real estate commissions can mean the difference between you making money and losing money on your house.” It seems like every city has self-help sites for sellers. Photo source TBD

The biggest opportunity for investors is the ability to avoid at least the listing agent’s commission. That leaves 3% or more in the deal, which enables us to pay more for a property and still make money. It also gives us the opportunity to increase our profit margin, but no opportunity is without risk. This trend is already visible in the increasing number of unlisted sales through Zillow, Trulia, and Craigslist.

In this case, investors, flippers, and redevelopers are assuming some of the risks that Realtors have assumed for us. We will be held more accountable for the accuracy of information and the completeness of repairs as we deal more directly with the buying public. This last bit is important. We may be held accountable for repairs we did not do or did not even know needed doing. Further, courts have a long history of holding developers and other vendors accountable for any miscommunication with “unsophisticated” buyers.

And many buyers will continue to use buyer’s agents. A buyer’s agent is a licensed real estate agent who represents the buyer, even though they are paid by the seller. Their job is to use their real estate expertise to ensure the buyer’s interests are protected and even enhanced in the deal. They negotiate concessions the buyer might not otherwise think of, but buyer’s agents don’t necessarily assume any responsibility for accidental misrepresentations.

That said, I love buyer’s agents. Our goal at Hermit Haus Redevelopment is to offer a home the new owners can be proud of. It’s part of our win-win philosophy. We make mistakes—you’ll see us talk about some of them on this site—but our goal is to offer the best house in the neighborhood. If we do that, we make the buyer’s agent’s job easy.

In his article, Haywood discusses the (im)possibility of stopping the Uber-ization of the MLS. I really don’t want to, even if it makes my business a little riskier. I believe it’s in everybody’s best interest (except maybe a few agents) to make buying and selling houses easier. I believe the ethical redevelopers, like Hermit Haus, will thrive in this new environment. We’ve already got more experience in our leadership team than many others, and we will continue to adapt and thrive as the market changes.

As Al Stewart translated Nostradamus, “The more it changes, the more it stays the same.” Quality will prevail in the market over cut corners.