ListPresentFinal_MP4 for fallcak at 600kps_003

►

Click here for the Lease or Not to Lease PDF

Click here for the Lease or Not to Lease PDF

There are Three Types of Homes on the Market Today

Each of these types of sales has their own characteristics, both good and bad.  Buyers need to be aware of the ins and outs of each.  Once those characteristics are understood, savvy buyers can use them to their advantage, make much better decisions, and submit stronger offers.  Also, buyers can avoid those pitfalls that might otherwise hurt their desires and derail their plans.

Here is a brief description of each:

Standard Sales	Short Sales	Foreclosures
These are the sales we are all most familiar with.  In a Standard Sale, the Seller owes less on the loan than the home will sell for in the current market.  He has equity.  He stands to make some money on the sale.  This kind of sale is also called an Equity Sale.	Although these have always been around, the current Recession has been responsible for making these kinds of sales a huge part of the market.  In a Short Sale the Seller does NOT have equity in the home.  The home is worth LESS than it will sell for in the current market.  The Seller needs to sell most likely because he realizes that he will lose the home in the near future through foreclosure.	These sales are also called Bank-Owned or REO (Real Estate Owned) sales.  In this case the bank has taken the property because the Owner has defaulted on their loan.

 Short Sales – the irony.

Short sales take much more time to work through the system than any other type of sale on the market, except perhaps probate sales and bankruptcies.  They typically take around three months longer to work through than Standard Sales and have been known to take more than six months longer.  Therefore they are not for all buyers.  Buyers that are in a hurry, or are inclined to become emotionally bonded to a property, should probably think hard before submitting an offer on a short sale.

Many buyers are justifiably very excited about the prospect of buying a home that suits them.  Once they find one and enter escrow, the process tends to become more emotional and less analytic.  That’s normal and good.  However, since short sales tend to take so long, this can be very unnerving, and can produce much more frustration and anxiety than normally exists in an already tension-filled process.

Here’s why the process takes so long.  In a short sale, the Seller is asking their lender(s) to accept a scenario where the house is sold at a market price – usually much less than what is owed on the property – and the seller is forgiven the remaining balance.  The Seller is asking to be forgiven the difference between what he owes on the property and what the property can sell for.

Why would a bank do that?  Well, in a situation where the Seller can no longer afford the mortgage payments (usually the Seller is already a few if not several months behind in payments when this process starts), the Seller knows that the eventual outcome is that the bank will wind up taking the home back in a trust deed sale, a foreclosure.  The bank needs to know that this is what the Seller sees as the inevitable outcome.  The bank will spend a great deal of its own money to foreclose on a property, clean it up, and turn it around for a sale.  The foreclosure process is expensive for the bank.

If the Seller can 1) show that they are not able to afford the house and that a foreclosure is imminent, and 2) that they have already found a buyer willing to pay the current market price, the bank stands to save money by getting the process over now rather than endure the lengthy and expensive foreclosure process.

The irony is that the bank takes several months evaluating both the Seller’s hardship and the prospective buyer’s offer.  Once it has checked out both of these thoroughly, the bank will either approve or disapprove of the sale.  If it is approved, escrow opens and the escrow period begins – usually 30 or 45 days – where buyers do their inspections and finalize their loan etc.  So it is only after the approval that the home is actually for sale.  During the evaluation period, both the buyers and sellers sit and wait.

What’s in it for the Seller?  Since the seller has worked through the process, secured a buyer and done the bank’s work, the Seller’s credit is hit much less than it would have been if the Seller had been foreclosed on.  All things being equal, a seller could expect to be able to reenter the home buying market again in roughly 2 years.  Under a foreclosure the seller could be required to sit out for 6-8 years.

Pricing.  This is where is gets weird.  If you haven’t found this a little tough to follow yet, hold on.  Remember we said above that the process cannot get started until the bank has both the Seller’s financial hardship information and an offer from a buyer.  From a Realtor’s point of view, and from the Seller’s point of view what the home sells for it not an issue.  Whether the home finally sells for $300,000 or $350,000, all the Seller is interested in is that the bank will forgive him the entire balance of the difference between the final sales price and what is owed.  The goal for the Seller is to get the short sale done, and avoid the foreclosure.  Whether the bank forgives the Seller $100,000 or $150,000 has little concern for the home owner. 

We mentioned above that most Sellers are behind on their mortgage payments when they begins this process.  That means that a foreclosure is looming.  Now, one would think that the bank would stop the foreclosure process while it evaluates the short sale.  However, sometimes the foreclosure timeline continues on one side of the bank while the short-sale is being evaluated on the other.  It is in the Seller’s best interest that the short-sale process begin as soon as possible.

That said, Realtors will often put the home on the market far below market price in order to get an offer in quickly to the bank along with the Seller’s financials.  What many buyers are not told is that when the bank is evaluating the short sale, it will send out appraisers to gauge the value of the home.  As the approval process winds down, if the offer from the buyer is far below the market price, the bank will counter the buyer with a price closer to market and will not approve the short sale if the buyer does not agree with that price.

Here’s a breakdown of pros and cons from a buyer’s perspective –

Short Sale Pros –

• Short Sales sell for around 3-5% below market.  Although banks are getting more aggressive about getting closer to market value, they still recognize that they must offer a discount if they hope to lure any buyers into enduring the excruciating process of the short sale.
  • But remember, it is often the case that the price the Realtor has listed the home at is less, sometimes far less, than its true market value and, if so, will be less than the bank will accept.  Make sure your Realtor gives you an honest evaluation of what the home is worth so you can be ready if the bank counters for more.
  • Buyers should not be under obligation while the bank evaluates the Short Sale.  Until the bank approves the short sale, the contract expressed in the offer from the buyer is basically inert.  That said, it is easy enough to craft the offer so that it remains very clear that until the sale is approved by the bank, you, the buyer, have no obligation to stay in the deal.  Make sure your Realtor knows how to craft an offer that will keep you protected and unobligated while awaiting approval.  A correctly crafts offer protects the buyer in that –
    • No deposit monies are actually deposited.  Escrow is not opened during the evaluation period.  So, buyers are not at risk for loss of their deposits.
    • Buyers can continue to shop for homes.  If they find another that suits them better, they can immediately withdraw their offer(s) on any number of short sales pending approval.
      • This is not how Standard Sales work.  One offer at a time here.
      • Short Sales tend to be in better shape than foreclosures.  The longer a home sits empty, the quicker it deteriorates.  Since the Seller is typically occupying the home at the time of the evaluation by the bank, the home tends to be kept up.
      • Like Standard Sales and Foreclosures, buyers do not pay commissions. 
        • In fact even the Sellers do not pay commissions in a short sale.  The short sale Lender, the bank, does.  Short sales should not cost the Seller anything.

The down side of Short Sales –

• Obviously, the wait and uncertainty.  There is no guarantee that a short sale will be approved.  It is possible that the bank will take the home in foreclosure at any time in the process.
  • Although emotionally hard, and a huge waste of the buyer’s time, at noted above, the buyer does not lose any money with a failed short sale.  Once the home is in escrow, the bank cannot foreclose on it.
  • The bank could counter for more money.  As we said above, if the fair market value of the home is far above the offer price, the bank will almost certainly require the buyer to come up with an offer more in line with the market value.
  • The bank could require the Seller to pay more, and that could fall to the Buyer.  Usually this happens in connection with the second trust deed or equity line of credit.  The holder of the second trust deed may demand more money as a pay-off than the first has agreed to pay.  Say, for instance, that the Seller owes $50,000 on a line of credit.  During the short sale evaluation period, the holder of the first trust deed, the mortgage, may agree to pay the holder of the line of credit $3,000 as a payoff.  The holder of the second, however, may demand another $10,000.  There are only two places the holder of the second can go for that extra money – the Seller, or the Buyer.  There are various ways to negotiate through this, but it can happen that the only acceptable solution is for the buyer to pay it, particularly if the Seller has no means whatsoever.  If the buyer refuses, then the home goes to foreclosure and the deal is off.
  • Termite and Home Warrantee.  In a standard sale it is most often negotiated that the Seller pays for termite inspection and certification as well as for a Home Warrantee to cover the buyer for the first year after the sale.  In both Short Sales and Foreclosures, this is not typically the case.  The bank is already losing tons of money, writing off the Seller’s short fall, so it is seldom the case that the bank will pay for termite work – or they limit their commitment to, say,  $500 or $1,000 – and they almost never provide a home warrantee.  So you, the buyer, have to figure those costs into the purchase.  Remember, almost all lenders will require a termite certification.  And forget asking for repairs.  Not going to happen.
  • HOA dues.  Buying a home/condo/townhome in an HOA regulated community poses its own challenges these days.  When most Sellers get to the place where they are not able to pay their mortgage, they frequently have not been paying their HOA dues for some time.  The HOA has the right to put a lien on the property.  In a foreclosure, the bank has already resolved this issue, but in a short sale, it may be a lingering problem and could kill the deal.  Any short sale of a home with an HOA obligation should be evaluated carefully to be sure clear title will not be threatened and so the buyer does not get surprised by what could be thousands of dollars of unpaid HOA dues, fines, fees, and interest.
    • Another issue for Condos and HOAs.  Many condo/townhome associations are going broke.  Many people are having a hard time making ends meet and HOA dues become just another one of the bills that don’t get paid.  If you buy a property in a community with a suffering HOA you will be paying dues and getting no service.  Eventually, one would hope, as the economy stabilized and recovers, those associations will become property funded.  But until then you may see the community degrading, and see little service for your dues.

This is not an exhaustive list of pros and cons, but it’s enough to get started with.

Foreclosures – Down and Dirty.

Sales of foreclosures (“REO” and “Bank-Owned” are other names for the same thing), bear little similarity to the hassle of Short Sales.  The process for sales of foreclosures is similar to standard sales.

In this case the bank has taken possession of the home and now owns it outright.  The process of the bank taking legal possession of the home usually takes many months and can go on for years.  By the time the bank has put a home on the market as a foreclosure, it has spent a ton of money on it.  The bank’s chief aim at this point is to unload the property as soon as possible.  The speed and confidence of a final sale are the chief aims of the bank, and can even be more of a priority than price.

The Benefits of a Foreclosure Sale –

• Price.  These are typically the cheapest homes on the market, often listed 7-10% below market value.
• Speed.  These homes come off the market and move into escrow far quicker than any other homes on the MLS.
• HOA.  The bank will have resolved any title issues including HOA liens.
  • However, that doesn’t mean that the HOA the property belongs to is healthy.  Make sure your Realtor checks it out thoroughly.

The Challenges of a Foreclosure Sale –

• Price.  Because the motivation of the bank is well known and the under market price of a typical foreclosure is well known, there is more competition in the market for these homes than for any other.
  • These homes are more likely to be bid up than with any other kind of sale.
  • Speed.  Because the bank is desperate to assure that the sale will close and close quickly, it favors offers that bring that kind of assurance.  For instance, a very motivated all-cash buyer can waive both the appraisal and the property inspection and virtually promise a close of escrow in a matter of days, rather than weeks.  A conventional buyer (a buyer with 20% or more down) will have a lender that requires inspections, appraisals and termite work.  Currently most lenders take around 45 days to fund.  If the property has suffered damage (see “Condition” below), the chances of a lender hindering the closing of the deal increases greatly.  If the deal falls out, then the bank has to go back to market and spend more money.  All the while the clock keeps ticking.  Therefore Cash is king in this arena.  The all-cash buyer has a great deal of pull here.
    • The illusion of first come, first served.  You would think that the best way to get a foreclosure, and get a home at a super price, would be to slam an offer in as soon as the home hits the market.  Not so here.  Banks require their agents to leave the home on the market for two to four weeks typically in order that all the really sweet offers come in.  You won’t get to jump the line by putting in a quick offer.
    • Condition.  Foreclosures are the most likely homes to need serious repairs.  They have been vacant a long time and of all the types of homes on the market they are the most likely to have been neglected or vandalized by their previous owners or by anyone.  So a buyer has to figure into the cost of the home, the associated cost of bringing it back up to an acceptable standard.  Another problem with this is that while many buyers don’t mind doing the fixes if the trade off is getting the home at a big discount, their lenders feel otherwise.  For that reason many foreclosures do not even qualify for FHA backed loans.
    • Termite and Home Warrantee.  As with short sales, don’t expect much here.  The bank has already taken a bath on this property and is not eager to spend another dime.  Maybe a little on termite, nothing on Home Warrantee, and nothing on repairs.  “As Is” means as is here.  Take it or leave it.
    • Qualifying.  It is common for bank-owned properties to require a buyer to cross-qualify within their own lending arm.  A buyer can always use whatever lender they want, but a seller can require a buyer to pass inspection, so to speak, with their own lending requirements.

 

Standard Sales – I remember when…

These days 40% or more of most Real Estate markets are distressed homes – either foreclosed homes or short sales.  The Standard Sale is one where the Seller has equity in the home and stands to make money upon selling it.

The Benefits of a Standard Sale –

• No hassle from banks– your own lender excluded.  The only people you’ll have to dicker with will be the Seller.
  • The standard seller will, however, be particularly motivated by the price.
  • Qualifying.  Although a buyer will have to work it out with their own lender, the Seller usually takes little interest, whereas in a foreclosure, buyers are often required to cross qualify, and in general make the selling bank nervous.
  • Condition.  As one might expect, these homes are the best kept of the market place.
  • Termite, Home Warrantee, and Repairs.  Is it customary in this market that the Seller pay for all the termite inspections and work required to provide the buyer’s lender with a certification.  Also, Sellers seldom resist a request to provide a Home Warrantee for the buyer for the first year.  And, after the property inspection, repairs can be negotiated whereas with Short Sales and Foreclosures, the bank will not even discuss them.

The Biggest Bummer of a Standard Sale –

• Price.  For the most part, standard sellers are the least in touch with the value of their homes in the current market.  They are understandably frustrated that they have lost so much value in their homes and attempt to recoup that by entering the market usually far above what homes are actually selling for.  It may be necessary to let a standard sale sit on the market for some time in order for the seller to start thinking more realistically about price (or remove the home from the market altogether).
  • It is fair that they should expect to receive a premium for saving the buyer a long or brutal hassle with a bank, like a buyer would find in a short sale or foreclosure.  A good Realtor would make it clear that, in order to stay competitive, an offer should reflect that benefit.

That sums up a brief, non-exhaustive, analysis of the ins and outs of the big three classifications of homes on the market.  And, as market conditions change, we can expect the details noted above to change, if for no other reason than the banks – responsible for two of the three classifications of sales above – are constantly changing their tactics, trying to figure out how best to handle the massive inventory of homes that are worth far less than is owed on them.

A few other notes – Things to keep in mind:

New Construction.  If there has ever been a wholesale market in real estate, this is it.  Buying a new home is and has always been buying retail.  The only difference now is that builders realize that they must stay competitive.

• Go in with your agent first.  If you trust your agent and rely on their advice and support, make sure that the very first time you visit their office that you bring your agent.  This is the only way your agent will be allowed to negotiate for you and the only way they will get paid.  Once you’ve gone in the first time, they own you and will not allow your agent to represent you.
• Get some concessions.  Builders know that these days they have to compete.  They will offer concessions like closing costs, heavy upgrades for the property like wood floors or a gourmet kitchen, or extended home warrantees – sometimes for 3-5 years.  These are valuable concessions and increase the value of your purchase. 

Lenders.  If a deal falls out of escrow, the chief reason it does is because of the buyer’s lender.  Shop your lender.  Do not take it for granted that they are all about the same.  Also, they are very competitive.  Many people do not know this because they don’t take the time to go in and fill out all that paperwork with several lenders.  But if you do, you will find that their rates and their ability to connect with lenders that have competitive loans vary widely.

A basic rule, an axiom, perhaps the single unchanging principle that you can always count on with the banks, is that the banks will never act against their own interests unless forced to.  Do not ever expect them to be nice.

To Lease or Not to Lease

This is a question both buyers and sellers ask.  Would it be better to buy a home or lease one?  Would it be better to sell my home or lease it out?  And as much as we wish big questions like that were easy to answer, they are not.

But that doesn’t keep us from trying to figure it out.  The first answer is “It depends.”  Not very satisfying.  But the best decision will rely completely on the specific circumstances facing the individual buyer or seller.

My job here is to lay out many, if not all, of the considerations for both buyers and sellers, so you can take that information, put it into your individual circumstances, and come up with a decision that fits your goals and your needs.

I am not here to convince anyone to do anything.  As with all my reports and analysis, my goal is to inform you, not to persuade you.

 For Both Buyers and Sellers – the value of the property.

The question that represents common ground for both buyers and sellers is what the value of the property in question is.  What will it rent for?  And, what will it sell for?

Figuring this out requires that you have an accurate view of the home’s value.  This is something very few people can do without the help of an experienced Realtor.  You cannot trust Zillow, Trulia, or other valuing sites for this, nor can you pick the house down the street and take the neighbor’s word of mouth for what it sold for.  Valuation is not an easy formula, and requires the skills of someone who does it frequently and accurately.  The good news is that a capable and reliable realtor will do this for you for free.  I will.

Back to our example.  Let’s say a roughly 3,000 sqft, averagely upgraded, home in Vista Del Verde (a newer community in Yorba Linda, CA), would sell for $830,000 and would rent for $4,700/mo.

Every month a home owner pays out cash directly related to that home that he sees no return for.  He sees no return for the interest on his mortgage.  He sees no return for what he spends on taxes.  And, he sees no return for what he spends on repairs, insurances, HOA, and the like.

If these monthly costs are significantly greater than what it would cost to rent the house then, it is easy to conclude that it makes more sense to rent the property than to buy it.  Likewise, if the cost to rent the home far exceeds those monthly out of pocket costs home owners incur, then buying becomes much more appealing.

From a seller’s point of view, if his monthly costs exceed what he could get for renting the property then the decision to sell rather than lease becomes much easier.  But this is not all that concerns the seller.  We’ll talk more about that later.

 Let’s look at our example:

		Value of Home	Rental Rate
		830,000	4,700
Mortgage	80.00%	664,000
Mortgage Rate	4.50%	29,880
Mort % per Mo		2,490
tax rate	1.08%	8,964
Tax/mo		747
Total Interest/Taxes		3,237
Less Tax write-off	35.00%	2,104.05
Home Warrantee	700	58
Home Fire Etc Ins	2,000	167
Repairs	3,000	250
Ownership Costs		2,579.05
Ownership Advantage		2,120.95	per month

 We are assuming that our buyer could put 20% down and get a loan at 4.5%.

Under this scenario, it is much cheaper to own than to rent.  This won’t always be the case.  The situation varies from neighborhood to neighborhood and changes over time.  So, a prudent buyer will need to do this research carefully – with the help of a good realtor – as will a prudent seller.  (If you would like this spreadsheet, let me know and I’ll send you a copy.)

 Buyer Specific  – What other concers are there specific to buyers?

There are factors, other than purely financial, that impact the decision on whether to buy or lease.

The Pride of Ownership Factor.  Some people feel that home ownership (rather than leasing) is connected to their private sense of prosperity.  That is, some people feel that leasing a home represents a certain “less-than” position than home ownership. 

Home ownership, for some, feels like a right, an American right.  So, some people will look at leasing as a kind of failure. 

On the other hand, some people love the idea of living in a home and not having to worry about all the extra cares associated with homeownership, like repairs, the HOA, the insurances etc.

For those that fit into the first group, they may be willing to pay more for ownership, just to enjoy the right of property ownership.  For others, they may be willing to pay more to lease just to have less to worry about at the end of the day.

The important thing is to be acutely aware of which of these two groups you fit into. 

“It’s the Perfect Time To Buy” Factor.   This is the idea that it is a great time to buy now, and that by not buying you will miss out.   Maybe it is, maybe it isn’t.  That said, you can probably step out of your house, throw a rock and hit a Realtor who will say without hesitation “Now is the perfect time to buy!” no matter what the actual conditions are in the market.

Whether it is the perfect time to buy or not depends a great deal on your individual situation. 

What are the conditions in the market as of the last half of 2011?

(This part I’m going to have to return to and occasionally update.)

• Most analysts feel, and I agree, that we are a long way from seeing the market turn around.  If it is going to “turn around” at all, it won’t be for seven years, maybe ten.  My feeling, in fact, is that it may be that we should not be waiting for the market to come back or turn around.  We may be facing a “new normal”.  I think many people are waiting to hear the news that it’s over.  The recession is over.  I have a feeling that rather than seeing us break free from it, we will live it more or less for the next twenty years.  If things improve, they will improve very slowly, not more than a couple of percent improvement a year.
• Even if we see jobs come back – and we should not expect to see that for a while, (I’m guessing four years, best case) – real estate will follow that by a couple of years because once people are back working, they will need to be working securely for a while before down payments, credit repair, and work histories can be established.
• Right now the whole world is broke.  No one is thriving.  The order of the day for both big business and government is to try to stem the bankruptcy tide.  All efforts right now are focused on trying to keep the world economy from crashing altogether.  Recovery isn’t even on the table.  Survival is what we’re hoping for.
• We are now selling at 2002, 2003 prices.  That’s roughly ten years.  The first five was up, and the last five has been down.  If we were to make an about face right this second, and right now start hearing that the economic news was nothing but positive, do you think it would be reasonable that we could be back to the peak in five years?  I don’t.  The fact is we are not going to hear that kind of good news for some time.  If it took five years to get here, we can’t possibly get back in less than five.  And I find it entirely unlikely that even in seven could we expect to see what most call the return of their home’s value.

The two big concerns for buyers are 1) is the house I’m thinking about buying today going to be worth less a couple of years from now? And 2) interest rates.

The answer to question one will be in most cases, I think, yes.  Or at best the home will be worth roughly what is worth today.  That’s the best case scenario for the next couple of years minimum.

The issue with interest rates is that while they are very low today, and that is very good for buyers, the reason they are low is that the overall economy is terrible.  Low mortgage interest rates are a sign of a suffering economy.  When all other investments are so unattractive that people are flocking to mortgage backed securities and the like, interest rates stay low for buyers.  So, it is a double edged sword.

Nevertheless, people are buying and selling homes.  Your specific situation may combine with the factors above and give you good reason to think now is the time to buy or it may not.  Do a lot of research, gather all your best advisors together including a knowledgeable Realtor, as well as your financial and tax advisor, and do the hard work to see if this is the right time to buy a home.

Above all else, remember that the emotional health of your family and marriage far outweighs all other concerns.  Be sure that whether you buy or lease, that decision serves the best interests of the most important things in your life.  Now is NOT the time to put yourself under more financial pressure.  Put yourself under less financial pressure.  That may mean buying.  That may mean leasing.  That may mean staying put.  Think hard about that.

 Seller Specific  – What other concers are there specific to sellers?

There is a lot more to consider for sellers than for buyers.  It gets complicated. 

First, let’s take another look at the scenario above, but let’s throw in some other numbers:

		COST of Home	Rental Rate
		1,250,000	4,700
Mortgage	90.00%	1,125,000
Mortgage Rate	5.50%	61,875
Mort % per Mo		5,156
tax rate	1.08%	13,500
tax\mo		1,125
Total Interest/Taxes		6,281
Less Tax write-off	0.00%	6,281.25
Home Warrantee	700	58
Home Fire Etc Ins	2,000	167
Repairs	3,000	250
Ownership Costs		6,756.25
Ownership Advantage		-2,056.25	per month

At the top of the report we put a current market value of the house at $830,000.  In this set of numbers we are not talking about the value of the home, but its cost. 

Furthermore, a home owner is not writing off mortgage interest and tax payments on a rental property.  In the seller scenario, the seller takes the amount made in rent payments and deducts mortgage interest, taxes, HOA, insurances, repairs etc., in order to calculate the net income that they will have to pay federal and state taxes on.

Here, the story is even worse than that.  It is common these days that home owners are paying a mortgage on a home that is more than what the home would sell for.  Many home owners are “under water”.  You can see that the numbers in this scenario are much less encouraging.  The ownership costs are nearly the rental rate.  Should repairs be more than the above budget, a home owner could be out of pocket. 

Furthermore, vacancy rate makes the above scenario impossible.   We’ll go over that later.  Let’s just say that if the above numbers fit a home owner’s situation, that home owner should get advice about the possible benefits of short selling the home rather than waiting for the market to turn around (see the market analysis under the section for Buyer’s concerns).

For the moment, let’s look at some more optimistic numbers:

		COST of Home	Rental Rate
		1,250,000	4,700
Mortgage	70.00%	875,000
Mortgage Rate	5.50%	48,125
Mort % per Mo		4,010
tax rate	1.08%	13,500
tax\mo		1,125
Total Interest/Taxes		5,135
Less Tax write-off	35.00%	3,338.02
Home Warrantee	700	58
Home Fire Etc Ins	2,000	167
Repairs	3,000	250
Ownership Costs		3,813.02
Ownership Advantage		886.98	per month

Under this scenario a home that cost its owner $1.25M to buy, and who owes $875,000 on the mortgage, could, in a given month, expect to pocket almost $890/mo by leasing the home, if all the other numbers remained accurate.  Still, he’s under water, owing more than the home is worth.

This is where a seller might hope that he could rent out his home, make a little money and wait for the market to return in order for him to sell without having to face a short sale.  He would have to sell for around $932,000 to break even considering his $875K mortgage and the roughly 6.25% sales costs assuming he could get a realtor to work for 5% commissions (which is fairly common these days).  That $932K represents a 12.3% increase in the current market value of $830K.  That is a huge increase.  Based on what we’ve said about market conditions above under Buyer’s Concerns, that is a minimum 4 to 5 year wait, and maybe longer.  That combined with the vacancy rate issues mentioned below make this a very hard road to pursue, but by all means doable.

The question I would have is why not just stay put?  Unless the seller was willing to move out and rent a much cheaper home (easier for some than for others), becoming a landlord seems like a lot of work for negligible returns.

Let’s look at some optimistic numbers:

		COST of Home	Rental Rate
		1,250,000	4,700
Mortgage	40.00%	500,000
Mortgage Rate	5.50%	27,500
Mort % per Mo		2,292
tax rate	1.08%	13,500
tax\mo		1,125
Total Interest/Taxes		3,417
Less Tax write-off	0.00%	3,416.67
Home Warrantee	700	58
Home Fire Etc Ins	2,000	167
Repairs	3,000	250
Ownership Costs		3,891.67
Ownership Advantage		808.33	per month

 In this scenario the home owner has lots of equity in the home.  He’s carrying a mortgage of just $500K.  Here, he stands to pocket just over $800/mo or around $9,700/yr (less taxes).  If the seller were to sell the home now at the market rate of $830,000, after costs they could expect to net out at around $278,000.

Before we talk about that, let’s look at that $9,700.

Vacancy Rate.   This bad boy should be the chief concern of any homeowner that wants to think about leasing rather than selling their home.  You can expect between one and two months vacancy to get your first tenants in if the home goes on the market for the correct rental rate. 

In your first year, you should count on not 12 month’s rent coming in but no more than 11, and probably just 10 months.

So, in the above example, if the home owner, on a good month can take in $800/mo extra, but then loses 2 months’ rent ( $1,600) while paying 12 months of home ownership costs of $3,891.67/mo, the overall yearly gain is just $300.  (Think how fast this amount can be eaten up quickly with a water break, a dead furnace, or a leaking pool, so get all those home warrantees you think you’ll never need.)

With three month’s vacancy the gain turns to a loss of $4,400.  So you can see that vacancy kills.

And because vacancy kills – Pricing is EVERYTHING.  If you overprice the home in a rental scenario, you risk losing a lot.

Let’s say you try renting your home for $5,000 instead of $4,700 because you’d like that extra $300/mo cushion.  If you can rent it in 30 days at $4,700, based on the numbers above, you could have a net gain of about $5,000 for the year.  But if you have to wait 90 days to get $5,000 (not at all an unreasonable possibility), then you will have had a net loss of just over $1,700 for the year, and will have lost $6,700 from what you could have made if you just started at $4,700 to start with.

And, in all likelihood instead of getting it rented in 90 days for the $5,000, you will be forced to then lower the price to the appropriate market rate of $4,700, having now come down to a yearly net loss of just over $4,400, and taking home $9,400 less than if you would have started at the $4,700 mark.

Do Not Count On that prefect tenant that keeps your home in perfect condition, and stays for several years.  Be very conservative with your estimates.  It is better to get a good surprise than a bad one.  Expect that you will need to trade tenants out every year.  Even if you get lucky with a tenant who stays for two years, the next one may only stay for six months.

Upkeep on a Rental Property.  Renting a home out is not for the faint of heart.  You will get late night calls that the toilet is leaking, and hot summer day calls that the air conditioning is out. 

There is a section above, under Buyer’s concerns, that discusses the current market.  If you are planning to rent until home values return, you are going to be in it for the long haul.  Probably seven to ten years.

If you are not up for that kind of back and forth, think hard about whether you are landlord material. 

Currently property management companies are charging between 7% and 10% to keep tenants in your property and help when they leave and new tenants come in.  You may be able to barter that 7% down, but don’t expect to go much lower than 6%.

The Investment Angle.  Let’s look again at that scenario –

Disclaimer.  I’m not a financial guy.  I’m great at valuation of property, but I’m not a loan guy, a tax guy, or a finance guy.  So, take these numbers with a grain of salt and check them with those you rely on.  I believe they are accurate, but again, I’m not the expert in this arena.

Let’s look at our example again:

		COST of Home	Rental Rate
		1,250,000	4,700
Mortgage	40.00%	500,000
Mortgage Rate	5.50%	27,500
Mort % per Mo		2,292
tax rate	1.08%	13,500
tax\mo		1,125
Total Interest/Taxes		3,417
Less Tax write-off	0.00%	3,416.67
Home Warrantee	700	58
Home Fire Etc Ins	2,000	167
Repairs	3,000	250
Ownership Costs		3,891.67
Ownership Advantage		808.33	per month

The sale of this home at the market rate of $830K would net the seller roughly $278,000.

If you rented out your home and were able to keep vacancy down to a month and a half a year (you’d be lucky to do that), and all the other costs above were accurate, you could bring home an extra $2,650 per year.  We’ll say we have to do this for seven years, so that’s a total of about $18,550.  Let’s say you put all that toward your mortgage, so now your mortgage is just $480,000. (I’m rounding these numbers a bit to make them easier to look at.)

Let’s say that things so well and that in seven years you are able to sell the home for $1,050,000.  You would net about $504,375 considering the reduction in your mortgage and the pay off ect.  That’s a great number.  Keep in mind this is a best-case scenario.

Finally, if you sold the home right now and took the $278,000, what could you expect to get for that investment after seven years?  At 3.3% compounded in seven years you would have a return of about $348,937.  Way up at 10% you’d be earning $541,743.  That makes the $504K from taking the rental route look like a competitive strategy.

So, given –

1. Super low vacancy
2. Super low home repair costs
3. a significant amount of equity in the home (minimizing the monthly costs of home ownership)
4.  the willingness and energy to work as a landlord for several years (right now I would say about seven years)
5. And, the riskiest assumption of all, that the market will have values up over 26.5% seven years from now

Now at last –

The scenario becomes potentially workable and profitable.

Your specific scenario will vary.

 To Conclude  – What’s the theme we’ve mentioned over and over?

Get advice.  Do the math. Consider the health of your family, and your realistic ability to pull off the strategy you select.

Whether it is better to buy or lease or sell or lease depends on your situation.  I’ve put down some things for you to add into your thoughts.

Be realistically optimistic.  I’ve preached this in the video section of my blog.  Being realistically optimistic does not mean disregarding the bad news of the economy.  It means weighing it, evaluating it, and acting wisely.  If things are not going to go better for the economy at large, at least be sure to act wisely so things go better for you.  We can take bad news.  In fact, we need to hear the truth.  What we do with that truth makes all the difference.  Those that burry their head in the sand won’t do well.  We take the circumstances that are given to us, and make the very best of them.  That is realistic optimism.  We can survive and even thrive in this economy if we will face it, and make good choices.

Thanks for taking a look at this.  I hope it was helpful.

Click here for the August 2011 Vista Del Verde Report

Vista Del Verde, Kerrigan Ranch Yorba Linda August 2011 REPORT

►

Christian Job Hunting –

Summer is winding down. Vacation memories are reduced to the sand wedged in the back seats of the van. Youngsters are beginning to act weird (even more weird), twitching, changing up their vocabulary. They can hear the herd calling, assembling. School is about to begin. For many newly graduated young adults, school is distinctly not about to begin. The issue of employment has taken its place. Four years ago the pressure to find a job was conveyed by parents as a heart-to-heart classified conversation where the sentence “It is time for you to grow up” hit the air several times. Three years into a worldwide recession no one is talking about maturing. The subject is about surviving.

The transition from unemployment to employment has a few key steps. On the time line, the first of these would be the unemployed perspective. What is it like to be in the job market? Next, there’s the interview process. Employers interview you and you interview them (sort of). Finally, once you’ve made it from not working to working, what should you expect from the work environment? Weaved into each of these steps, as into each stage of our lives as Christians, is the issue of where we can expect our faith to impact this process. We will take a look at these steps and hope to offer some encouragement and perspective for job-hunters. We’ll also pepper in a few tips for job-hunters, because everyone needs another list.

What it feels like to be in the job market

These days, any article that hopes to offer encouragement for those entering the job market must start with those who were out if it and now find themselves in it. The worldwide labor market is in a dismal condition. Many people who have had at least one and often several careers have found themselves unemployed at a time when they and their families desperately need them to be working. These people should be the first on the mind of anyone speaking to the issue of finding work.

Many of these people are excellent examples of what it means to be living their faith, though they would not say so. They are being pressed to the very limit of their ability to hope. They did not expect to be here. They did not expect their homes to be on the brink of collapse this late in the game. Many have given up the idea of retirement altogether. The best they are hoping for now is to get the kids through college, or perhaps just keep the home they are in and avoid moving in with their parents at the ripe old age of 40 or 50. Grandparents are pouring out their retirement savings, supplementing their children’s meager earnings in hopes that the grandkids can make it through this recession without having missed the opportunities their parents got and thought we would easily pass on for future generations. Marriages are being pulled apart. Fingers are being pointed, blame is being handed out. Despite the failures, and the feelings of anger, desperation, and depression, they are wrestling with God and their faith daily, hourly.

Christians in this position are living their faith in ways they had never dreamed of. They find themselves confused about their very identity, because so much of who we are in this American culture is what we do. Our professions have defined us. They have been the basis for our confidence. Now, as we try to find a job, we again wonder who we are. Every day out of work chips away at our confidence until we go numb and find it easier not to send out the resume again. We begin to wonder whether we were ever capable, and we begin to think no decent employer would ever think we were. The next job may be something we never thought we could do, in a totally different field, and come at a time of life when we thought we would not have to learn a new trick, much less a new career.

That is living on the edge of our faith. Christians in this position are not thinking about evangelizing around the water cooler. They are not wondering about whether the human resources guy across from them goes to church or not, or whether their foreman will care that they have a bible study on Tuesday evenings. They are not thinking about whether this job particularly fits. When you are in this position, you are praying with all your heart to get that job. Once you get it, you will figure it out, once again, by praying with everything you’ve got and working until you fall over. This is what you are hoping for. Clean, uncluttered, desperate hope. No glossy illusions. No lofty goals. Just give me the job, please.

My desire to encourage someone in this position is tempered by a need to not be superficial. I have been in this position. It feels horrible. When we are here we are hoping for one quick action that will set the cart right, that will suddenly put us in the groove. Get that one job, then everything else will fall into place. Even those who are trying to encourage us are waiting for that one bit of truly good news that they trust will be the end of all the bad news, to be done with the sad times, done with those sad prayer sessions. But that is not how it works. Life is complicated, and the road back is rocky and unsure. In fact, looking at it as a road back is misleading. We are not going back to good times, we are going forward to different good times. Usually there are several challenges that have to be met and overcome. You will find, when it truly is all over and your feet are firmly in good times again, that you were forced to exhibit more faith, endurance, and patience than you ever thought possible over a very long period of time. You will be amazed at how far you have travelled. Toward that goal, do not let your guard down. Do not let the bad times distort your perspective – losing your job or home is not at all like losing your family or your loved ones or your life. Lots of people, pick up and move start all over. Lots of people humble themselves and have to accept charity from others. Lots of people improvise for a very long time. Living in a hotel, or a car, is not the end of life, it truly isn’t. People who say they can’t survive having experienced such a horrible circumstance have missed the point – they already have survived. And again, do not let your guard down. Do not let the good times distort your perspective. Rejoice in your victories but do not suppose that another challenge is not just approaching. Celebrate tonight, because tomorrow is another fight, another obstacle threatens to overrun your progress. Pray for perspective as well as endurance. Be thankful that all these hardships are not the end of your life, or the lives of your loved ones, or the end of your family. These twisted, difficult experiences will be the very strong foundations of your life after the desert. But it is a long vast desert. We are survivors, by God’s Grace.

Having spoken to these hard times, let’s turn to the recent graduate or those who find themselves for the first or second time attempting to enter the job market with the hopes of establishing a career. The American middle class mentality behind the graduation season and that last effortless summer stand opposed to our current reality. Graduation is promoted as a celebration of the hard work of school. In fact it is the way we fill up our young adults with encouragement, confidence, enthusiasm, and optimism for the coming challenges of working for a living. It hopes to give the graduate a good running start at what will be a challenging job interview process and a really challenging entrance to the work place. A lot of fantasies will be shattered in those first few years and one needs some optimism before heading into that battle. A wedding does the same for those entering a marriage. It is not that marriage is not what it is cracked up to be, it is just that it is not easy. It is fantastically rewarding, but it is never easy. In the same way the birth of the baby provides the excitement and optimism required to begin facing the challenges of actually raising a family – although it should be said that at least for the mom the big moment is much different than walking across the stage to receive the diploma or saying “I do.”

The Job Interview

In those months leading up to the first round of interviews, knowing young adults as I do, it is common to fantasize about the work place, with its likely quick promotions, its grey haired bosses corning you for your opinion, and, of course, the cute girls and guys at nearly every cubicle. And I have ruled over young adult groups at church where equal time was given to visualizing all the great work for Christ that would be accomplished by eager young Christians as they stepped through the large glass doorways of twenty story office buildings in slow motion. A force to be reckoned with. A young well-taught Christian would be normal if he had put a list together of requirements he expected from a hiring company that would properly align with his faith and with his good intensions toward an employer truly deserving his gifts.

When I was young, I had it in my head that entering the workforce was like entering society, like a rite of passage, as if the work-force wanted me in there, and was better for having me. Without me there would be a weakness in the force. This idea works very well for institutions like the family, and the community. It was quite a shock to be told at the first job interview that I had no experience and that my schedule wasn’t going to work. “Bye, good luck.” Well, that wasn’t very much like a family at all.

This is why I thought it would be best to hit the note of reality hard at the beginning. You can imagine that a lot of the lofty ideas we have regarding finding the perfect job simply evaporate in practice. This is really the best thing, though, as I will explain later. The important thing to keep in mind now is a clear concept of what it means to work for a company.

All that said, here are some practical tips. I don’t pretend to be an expert in this. I’m just old and have had to do it more than I’d like to say:

Don’t feel you have to get a job outside of your strengths. Lean to your strengths. Some say you need to stretch yourself and get out of your comfort zone. Any job, if taken seriously, especially because of the people in it, will get you out of your comfort zone. In terms of being valuable to others, lean to your strengths. If you hate long tedious work, don’t take a job as a programmer. If you are really not good with strangers, don’t take a job where you have to cold-call people. And don’t over spiritualize this. I’m not talking about picking companies based on your spiritual gifts of mercy, love, etc. We are just talking about those things you are gifted at, that everyone gets a sprinkling of just for being alive in a world where their Maker loves them.

Though I’ve said a lot, and will say a lot, about sucking it up and dealing with the work environment. I am not suggesting you tolerate racial prejudices, sexual harassment, discrimination in any way, or a work culture clearly dangerous to your own. I had a sister-in-law interview at a place that kept a keg of beer on hand in the break room. I know many of you will be emailing me to death about where that job can be found, but for her it wasn’t the right thing.

If a place feels wrong and you’ve been praying about it, then don’t work there. Remember, the interview process is two sided. Perhaps I haven’t emphasized that enough here. You should go into the interview with questions about the company. Find out for yourself what they do and how they think.

Get the money going in. If you have a bottom line number you have to make, don’t let a smooth talking manager suggest there are ‘real growth opportunities’. There aren’t. You may get to be a manager in a year, but you’ll just be earning $0.15/hr more. Raises come very, very slowly. Almost certainly your biggest raise will come when your current employer refuses to give you one and you find another job with your new resume that the old employer helped you build. This is probably the tip you will be most tempted to disregard if you find an otherwise fun job and a very charismatic person wooing you about all the great possibilities, but mark my words, get the money going in or you won’t get it at all.

When you go in for your interview, go in prepared. Take it seriously. Get the resume sparkling. Get dressed. Get cleaned up. Shave. Don’t go in there looking like you think you are doing them a favor. Something that really bothers me these days is our tendency to say “if it’s God’s will…” when we have not done all we can. If you want the job, fight hard for it. If you don’t, then don’t put it on God.

Also, those hiring you don’t care about your Christianity. They don’t hate it and they don’t love it. Mentioning your faith in the interview could only be helpful if the human resources person was educated, because it is taught in business school that persons of faith, any faith, are more likely to fulfill obligations and behave ethically. However, you will find plenty of Christian managers who will be the first to tell you that some of the worst employees they have had were professing Christians. Remember, we don’t live in a culture that hasn’t heard about Christ. They are not going to be blown away by the gospel story. Some of them will actually know the gospel and the rest will think they do even if they think that just because they’ve seen a bible on Grandma’s nightstand.

Your Christian Witness on the Job

Primarily, your job, all jobs, come down to you, the worker, earning a lot more for the company that you are being paid. That is the nuts and bolts of it. They agree to pay you after you make them lots of money. Furthermore, they have a very good idea of how you will do this for them, and they will show you. They are not asking you to show them anything. And, it is arrogant to think otherwise. After all, they have built a company and are so successful that they can afford to hire someone. We have not built a company, are not experts in their field, and it is we that need to be hired.

Probably all this seems harsh, especially when you may have so many graduation cards telling you that great things await. Great things do await. The great adventure of your life awaits. Many, I suppose most, of the middle-aged Christians who are out of work in these economic times but otherwise would not have been, are finding out that God intends for our lives to be an adventure from start to finish. And the adventure they are living, trying desperately to hold their lives and families together, is more unpredictable and dangerous than any Hollywood could have written. Great tragedies go with great victories. We are being thrust into life, thrust face to face with people we do not know and would not have chosen to know. In all probability you won’t be evangelizing around the water cooler, you’ll be trying to avoid the insanely obnoxious girl with the weird piercings who never does any work who hangs out there.

The way that you will witness to your faith at work will almost certainly be like this: You will show up on time every day. You will never ask someone to take a shift for you. You will finish all your work at a very high standard no matter how excruciatingly boring or pointless it is. You will not talk at work, but only on breaks. You will never forget that your duty is to make this company a lot of money by doing exactly what they say, over and over again. Act like you want the place to succeed and be the most successful, lucrative business in the county. That’s for starters.

Don’t be a push over. Stand up for what you think is right, but keep a check on your anger and always realize you are the worker, not the boss. When the argument is over, let it go. Whether your point is recognized or not, go back to work and pray for a cheerful heart. When you have trained yourself to do that, you will, through lots of prayer, silently, without them knowing it, pray for those around you.

Then, one day, if you are lucky (it may be years down the road), someone there will ask you how it is that you stay so cheerful in such a horrible place.

This is a tricky point. I do not believe in pretending to be cheerful. I’ve tried it and I usually fail before the hour is up. Sometimes we Christians think that by masking our real feelings and being all fakey, we somehow fool people into thinking we’re nice. We don’t. Being cheerful in the workplace – or anywhere – is a work that Christ does in us, and, like all His work, can only take place when we are honest, not pretending. I said this is an adventure. You’ll have to wrestle with these people. You will be wrong much of the time, but this is Christ working on you.

The irony is that the workplace will work on you far more than you will work on it, like all close environments. The same and more can be said about the family. Whoever said the family was a place of peace and harmony never had one. It took G. K. Chesterton in Heretics to point out that very obvious fact to me. The family is a fantastic institution, the best, and it is where you learn more about life and people than anywhere else, if you will stay in it and face all that tension and stress.

If you want to create a stir in the workplace, then treat that dungeon like the adventure it is and give it everything you’ve got. That kind of enthusiasm will freak everybody out. But you can’t fake it.

My tough-love advice is meant to temper the worker that has an exaggerated sense of where they will enter this process and a conversely understated sense of just how big the adventure will be for them personally. We forget that a real adventure must have an unexpected challenge at every turn, it must be risky and it must be hard.

So with that in mind, go forth young – and old – Christian soldier. May God bless you, and I hope you get that job!

Click here for the New Identity Article for on Careers and Callings in the Fall 2011 Issue

I just published a quick-read novel for the Kindle. You can check it out here – The Finishing Threads
It’s nothing about real estate. Actually it was supposed to be a romance novel and turned out more like Romancing The Stone, much more adventure-ish. I did the first draft about 20 years ago, with a lot of urging from my mother. Nothing ever happened with it, and I decided to give it a re-write and, of course, 20 years later, who needs a publisher? Well honestly I’d love one, but until then, this will do. I think it’s a fun read. If you do check it out, I’d love to know what you think.