Here’s a great video by a real estate agent over in Virginia that lays out the plain and simple truth to home sellers in today’s market:
And if the video wasn’t entertaining enough for you, check out some of the reaction among other blogging real estate agents around the country. Most of the agents in the various blog comment exchanges reacted positively to the video, but there were some exceptions…
Phoenix agent Greg Swann calls the video “pandering and condescending, insulting to consumers.” Really Greg? I would consider it pandering to tell a customer: “Oh, this home is so fabulous! I’m sure you’ll get top dollar. Don’t worry about declining prices in the comps, this house is special.” This video seems to me to be exactly the opposite of pandering.
Former Mortgage Broker Todd Carpenter says “I think the video is terrible” and calls it “selfish advice.” I can somewhat see the selfish point, since as an agent volume is more important than price. But “terrible”? Really?
Chicago Realtor Ken Smith declares that “this video alone would guarantee I would never use your services if shown to me.”
I find it quite amusing that such a simple concept can be so appalling to some people “in the business.” As an industry outsider and some-day home buyer, I find straightforward, honest content like this to be refreshing. If I was considering using an agent to sell a home and was shown this video, I would think “how nice that they are willing to be honest with me,” not “I love it when salespeople treat me like a moron.,” which is what Mr. Swann thinks “consumers” would say.
Hat tip: Dustin Luther’s (of RCG fame) shared Google Reader feed.
Jump to the bottom to add your comment. ↓
84 responses so far ↓
1
deeplennon
// Dec 21, 2007 at 8:09 am
First! Oops.
I’m sure the video is great, though blocked here :)
2
David McManus
// Dec 21, 2007 at 8:14 am
Dang it, I wanted to be first :-(
Excellent video, Tim. I should have a viewing party (with food and adult bevs) this weekend at my house for all the neighborhood who have had their homes on the market for 6+ months. You have to plant a seed to get anything to grow. :-)
3
Ray Pepper
// Dec 21, 2007 at 8:25 am
I like the way he pushes the message up and back to the camera. The music is comical too. … I have been told over and over by people that 500 Realty needs to make a U Tube Video. Maybe this will spur us on. Our head knocker video on our home page was produced by Comcast for $1000. Not sure what that will do for 500 Realty on U Tube. Thoughts?
Ray Pepper
Broker
http://www.500Realty.net
4
softwarengineer
// Dec 21, 2007 at 8:39 am
I AGREE WITH TIM
When did simple pragmatic neutral truths become not politically correct?
I’d add this too, what’s politics got to do with science; like lower prices are good, overpopulation is bad, etc, etc….
5
Tony Soprano
// Dec 21, 2007 at 8:49 am
As an agent, I have to say, that video is AWESOME! Why didn’t I think of that? I firmly believe that those of us that don’t throw our clients in the financial woodchipper will be rewarded.
6
David McManus
// Dec 21, 2007 at 9:16 am
Mr. Soprano,
If you are an agent, I think your last sentence says it all. I firmly believe that the agents that are out there for their quick buck and think that it’s ALWAYS a good time to buy will be looking for work. The agents that have suggested waiting and who provide actual value, and there are SOME out there, will have their pick of clients. Just my 2 cents.
7
Ira Sacharoff
// Dec 21, 2007 at 9:27 am
I loved this video…What do they say? A little knowledge is a dangerous thing? I recently had a listing for a condo. The owner insisted on asking the same price that a similar condo sold for in July( against my practical advice.)
The condo was on the market for two months before it finally sold, after two price reductions and a burial of a St. Joseph statue.
I’m honest, but I try to restrain my impulse toward bluntness. I was really tempted to scream ” Yo, dumb"chocolate", you’ll never get that price!”
8
Jay Thompson
// Dec 21, 2007 at 9:43 am
David wrote: “The agents that have suggested waiting and who provide actual value, and there are SOME out there, will have their pick of clients.”
Precisely. Over the last three months we’ve had 8 listings expire unsold (almost 60,000 homes on the market, about 5K sales per month — you can do the math, expires happen). We told all eight of those that it would be best if they could wait to re-list to just that, wait.
My broker about had a stroke because 6 of the 8 chose to wait. 2 *have* to sell, even though it means taking a bath.
But you know what? All six that chose to wait have said they will re-list when the time is right. With us.
No one makes money listing a home. Commissions are earned when a home sells.
Is now a “great time to buy”? (quoting the NAR). Sure, for some. Clearly not for all.
9
johnnybigspenda
// Dec 21, 2007 at 9:55 am
math according to that video:
if: you (heart) house
and if: house = $
that means: you (heart) $
I’d say that’s true for both sellers and buyers…
if: house = (big) $
and: buyer (hearts) house if and only if $= (small $)
no sale.
if: seller (hearts) (big) $
and if buyer only has (small) $
no sale.
then it just depends on if the seller MUST sell or if they just WANT to sell.
If there are a limited number of MUST sellers out there, and the WANT to sellers think house = (big) $, then supply and demand will continue to set the price somewhere between (big)$ and (small) $.
then the question becomes, where does demand come from? if Buyer are totally discretionary (and act rationally) they will wait until house = (small $). But as we know, buyers are not rational and therefore will continue to buy somewhere above (small) $… so we may never achieve (small) $.
10
NotaBull
// Dec 21, 2007 at 10:05 am
“buyers are not rational and therefore will continue to buy somewhere above (small) $”
In times where financing is easy to obtain and prudent underwriting skills are a distant memory, I would completely agree with you. The difference in the market now is that it doesn’t matter how much a buyer might want to spend on a home, they won’t get the financing for more than they can afford.
It’s not purely a supply and demand equation. Underwriters are back, and it’s about time…
I’m not saying there won’t always be a premium to buy a house vs rent a house. But that premium will likely revert to historical norms.
11
David McManus
// Dec 21, 2007 at 10:06 am
private String whatDoIHeart (boolean iHeartHouse) throws BankException{
if (iHeartHouse) {
if (costsALot) {
if (iHaveMoney) {
return “I HEART $$$”;
} else {
thrown new BankException(”Don’t buy sh*t you can’t afford!!!!”);
}
} else {
thrown new BankException(”dream on!”);
}
}
}
12
Shane
// Dec 21, 2007 at 10:14 am
Great, the annoying Slashdot “first!” thing was bad enough…now code.
13
nitsuj
// Dec 21, 2007 at 10:27 am
David McManus FTW!! Hilarious.
14
David McManus
// Dec 21, 2007 at 10:50 am
Sorry, I just couldn’t help myself. ;-)
Merry Christmas, everyone.
15
Old Dog
// Dec 21, 2007 at 10:51 am
Wow. Very simple but true. Good agents have been telling their clients this same truth for years and the truth is that it doesn’t matter what you think your house is worth unless you want to ‘buy it back’. What matters is what a buyer thinks it is worth and that you both somehow agree.
Great music..jazz classic. My only mild compaint is that the video poster rips off an idea Bob Dylan used much more effectively 30 years ago so we could actually hear and see the words to his now classic song: Subterranean Homesick Blues!! Hey, it’s got home in the title..one of the best video’s ever procuced IMO but that’s a whole ‘nother post…
16
Buceri
// Dec 21, 2007 at 10:59 am
Old Dog - the song is the bossa nova classic “Garota de Ipanema”, written in 1962 by Vinicius de Moraes and butchered by blue eyes later on….
17
Markor
// Dec 21, 2007 at 12:17 pm
While it’s true that any home will sell for the right price, sellers would be remiss to ignore the fact that most buyers are irrational. Nice furniture can greatly increase the price buyers will pay, for example.
18
David McManus
// Dec 21, 2007 at 12:29 pm
Agreed, Markor. Just make it look it pretty with nice furniture. A plasma on the wall helps too. Make them actually believe they will be getting all that stuff after closing. Certainly that justifies their overpaying by 50 - 100K.
19
Markor
// Dec 21, 2007 at 12:39 pm
Another one is cosmetic fixups. Every $1K in fixups bumps up the price buyers will pay by something like $10K. Buyers should want to see old carpets and marked-up walls, but new beige carpet and a fresh coat of white paint pays off for sellers.
20
David McManus
// Dec 21, 2007 at 12:43 pm
Oh, I almost forgot, make sure the agent working the open house has large breasts and wears something low-cut. Must be under 40. Miniskirts help too.
21
rose-colored-coolaid
// Dec 21, 2007 at 12:51 pm
Markor, I do believe you are making these numbers up. Until 2003, I had never heard of any upgrade returning a profit when the house was sold. Even bath/kitchen upgrades were in the 98%-102% type of range.
True, if a house has chewed up carpet, and mud packed all over the walls it might sell for more if you fixed it up, but now you are really getting into expectations of buyers. If I walk through a house and its filled with bags of garbage, then I think the seller took poor care of the home. Ergo, I expect a discount because who knows if the house is even fundamentally sound.
In other words, fix-ups aren’t making the house sell for more, they make it sell for less negative. And FYI, there is nothing irrational about this. In every transaction, people build the generally correct assumption that something is lower quality if it looks used up.
22
hisa hora
// Dec 21, 2007 at 1:16 pm
Greg Swann only posts crap like that so that people will link to his unpopular blog, he’s all about trying to get his alexa up
What an ass
Great video. I’d give that Realtor my business
23
b
// Dec 21, 2007 at 1:22 pm
David,
bubble.java:13 ERROR whatDoIHeart (boolean iHeartHouse) must return type String
24
b
// Dec 21, 2007 at 1:25 pm
Markor,
Here are some stats to backup rose-colored-coolaid’s comment. On average you are looking at getting back around 70-80% of the cost to remodel. Sure, those flipper shows on TV say that adding a $10 lamp increases the value by $10,000, but in reality that is not true.
25
John
// Dec 21, 2007 at 1:41 pm
There are times and situations when overpricing is a good idea. RE is not like ebay where prices should start low and let the bidders drive them up.
26
TJ_98370
// Dec 21, 2007 at 1:49 pm
A Realtor from Scottsdale, Arizona has a timely solution for the downturn in the real estate market:
How to help the real-estate market
27
TJ_98370
// Dec 21, 2007 at 1:53 pm
See Dec 21 Comic
Non Sequitur
28
TJ_98370
// Dec 21, 2007 at 1:56 pm
Top Ten Ways to Sell your House in Florida
29
Jeff Barr
// Dec 21, 2007 at 2:16 pm
If we’re going to have code in this forum (something that I am all for, by the way) then let’s make sure that it will compile and run.
David’s code has several undeclared variables and also falls of the end without returning a value.
Also, is this a member function of class Buyer, Seller, or Realtor? It seems to me (and I have to be really careful here because @wife is a Realtor), that this isn’t clear from the code.
Good stuff!
30
johnnybigspenda
// Dec 21, 2007 at 2:23 pm
Would you rather buy a house that was priced at $350K for $350K? or a house for $350K that was priced at $450K?
In hot markets, realtors price houses low to get lots of lookers (and the ensuing bidding war). I cool times they do the reverse. EVERYONE expects to pay below asking right now… so they are priced that way.
No such thing as the no dicker sticker in RE.
31
Markor
// Dec 21, 2007 at 2:31 pm
I’m not talking about a remodel or cleaning up dog poop in the house, just cosmetic fixups. It would be nice if Mythbusters would prove the high monetary value to sellers of a can of paint, but until then it will just have to be common wisdom. (Sorta like how it’s common wisdom in this blog that prices will keep falling.)
A sample of one: A friend of mine bought a house that had sat on the market for months and had been used by college kids whose parents (who owned the house) lived in Hong Kong. The students had let the steam from their rice cooker warp the kitchen cabinet doors; otherwise it just needed new carpet and paint. My friend got a great deal on that house compared to comps and ended up getting a 14% annual return after paying for fixups, far more than comps appreciated.
Whether the outlook is less negative or more positive, it’s a greater cost to buyers. It is irrational for the buyer if price is of major concern. Even a homeowner whose house looks pristine may not know about major problems; that’s what the inspector is for. Buyers looking to get the best value for their money should prefer houses that look used up but appear to have no major problems (inspector verifies). I think it’s safe to say that few buyers think that way.
Here’s another example: I like this show on HGTV called Property Virgins, which features a savvy agent who holds the hand of first time buyers. One time the buying couple wanted a certain house priced around $400K. The buyer’s agent told them, paraphrasing, “That house is underpriced and perfectly staged. That means a bidding war. To get that house you’ll end up overpaying by $20K, $40K, or the sky’s the limit!” I thought that was great advice. She steered them to a more right-priced house and pointed out that the seller is a professional landscaper who had put $100K of materials & labor into the great-looking yard.
32
Joel
// Dec 21, 2007 at 3:00 pm
Yup, the biggest turn off for me in a listing description is a checklist of recent upgrades. It means that the seller is expecting 2-5x their investment and since buyers are still so clueless they’ll probably get it (even if it is less than in the past few years). Show me a house in good condition, but in need of updating if you want my attention.
33
Runs With Scissors
// Dec 21, 2007 at 3:20 pm
Makes you think, it the Seattle Times and King 5 really wanted to do some investigative reporting on a serious matter that affects not only the economic future of this region and the country for that matter, they should find some of the most outrageous listings and schedlue a appointment with the listing agents to see them as “undercover” buyers.
Woops, I forgot about those advertising dollars vs. unbiased reporting, scratch that idea. Although you talented web bloggers out there….. ;-)
34
vboring
// Dec 21, 2007 at 3:33 pm
anyone know a good site for discussion for the international housing bubble?
a lot of places have it worse than the US and we’re all going down together. i kind of wonder how the housing crash in Spain will impact international banks.
there is really only one international financial market. trouble in one can only be offset by strength in another so much. trouble in all of them at once could make for a tough decade.
35
Raminder
// Dec 21, 2007 at 4:22 pm
The 500realty.net commercial is good one too, although it is not as long as the one on YouTube.
36
wreckingbull
// Dec 21, 2007 at 5:13 pm
Yup, the biggest turn off for me in a listing description is a checklist of recent upgrades. It means that the seller is expecting 2-5x their investment and since buyers are still so clueless they’ll probably get it (even if it is less than in the past few years). Show me a house in good condition, but in need of updating if you want my attention.
Not only that, but usually said upgrades look like they were done by a 2nd-grader. (No offense to your 2nd-grader if you have one) Not only do you need to spend your time and money doing the place right, but you need to rip out the prior owner’s hack-job before you can even get started.
No thanks.
By the way Markor, you do realize most of that real estate porn on the boob-tube is staged, don’t you?
37
Leo_J
// Dec 21, 2007 at 5:57 pm
Cool video so very SIMPLE and correct! My neighbor is on his 5th RE (first was FSBO) and needs to study your video. Sorry to the RE that bash your straight up no non-sense ideal. I guess RE’s going from cocaine high of the early oughts (2000-2005) to the crashing and jonesing of 2006-2010(?) is too much to handle. Ouch!
38
Markor
// Dec 21, 2007 at 6:28 pm
Doubtless there’s tons of editing done for the HGTV shows, but I don’t think they’re fiction, if only because that would cost a lot more to produce. On Designed to Sell, where they stage a house that isn’t moving, the end result is not always a clear winner. On Buy Me, where HGTV is a passive observer of the selling experience, the houses don’t always sell, even after many months—not exactly an advertisement for real estate. Also I was once a first-time buyer myself, so I can attest to making some of the same mistakes that the buyers on Property Virgins do.
39
Markor
// Dec 21, 2007 at 6:41 pm
On Designed to Sell on HGTV they sometimes make rectangles on the dining room walls out of chair rails, for an elegant look on the cheap. It really looks like the $10 they spent, but the buyers inevitably ooh and aah over it. (If anything’s staged, that it.) Recently they put little floral curtains on kitchen cupboards. The seller said “That’s so cute!” and the designer replied “That’s the reaction we want from the buyers!” Barf!!
40
Mama
// Dec 21, 2007 at 6:47 pm
“Yup, the biggest turn off for me in a listing description is a checklist of recent upgrades”
Well, I suppose you’re right but there’s an audience for everything. We only look at houses where the roof and other major things were recently updated…When you have small kids and a full time job building sweat equity is not that high on my list — I know there are just things we’ll have to pay for.
41
Markor
// Dec 21, 2007 at 7:07 pm
Updates have a value with labor included. Why pay $30K for a $20K roof, installed? You can end up paying $30K more for the house just by reducing your pool of house possibilities to just those with newish roofs. The only reason I can see to do that is if the roof definitely needs replacing before you can possibly save up the cash to have that done.
I recently replaced my water heater; it cost all of $1200, less than 0.2% of a typical house value. Yet most buyers would I think include that in a list of “major things” and end up paying > $2K if the seller replaces it, esp. if the seller replaces it before the old one needed to go.
42
b
// Dec 21, 2007 at 8:02 pm
Jeff Barr said,
If we’re going to have code in this forum (something that I am all for, by the way) then let’s make sure that it will compile and run.
I agree, I think we should schedule some peer code review sessions before the post is accepted and put onto the page. Easier to catch things now than revert the change later.
43
David McManus
// Dec 21, 2007 at 8:27 pm
Jeff Barr said,
If we’re going to have code in this forum (something that I am all for, by the way) then let’s make sure that it will compile and run.
I agree, I think we should schedule some peer code review sessions before the post is accepted and put onto the page. Easier to catch things now than revert the change later.
Hey, guys, considering it was on the fly and I had a hell of a time with the formatting, I think I did pretty well. I promise to not submit anymore code without at least going through a review process first.
44
b
// Dec 21, 2007 at 8:50 pm
David,
That is good, make sure to include who reviewed your code and what static analysis tests were run in your checkin comments.
45
wreckingbull
// Dec 21, 2007 at 10:01 pm
Any more talk of code reviews and I will start unleashing my Perl one-liners on all of you. Write once, read never, baby.
46
Wm Swanson
// Dec 21, 2007 at 10:27 pm
Markor: You paid $1200 for a new water heater?? You got ripped off unless it is supersized with some amazing technology. I have replaced 3 water heaters recently in rentals (all 50 gallon gas) that cost me $475.00 installed for each by a plumbing company.
47
Amarjit
// Dec 22, 2007 at 1:32 am
I have been in the computer industry for a long time and I don’t think the artificial inteligence (IE) industry is there yet to even predict or achieve what humans “wants’ the experinece brings in buying a new house. I know a lot of people have lost $1,000 or more in their lifetime and now they do bean counting on losing few % to the downturn, what eventaully would come up any way?
48
SeattleMoose
// Dec 22, 2007 at 9:22 am
Clicked on “comments” and observed the sharks biting each other. The measure of a person’s character is best measured on their behavior in a crisis. That blog speaks for itself.
49
Kime
// Dec 22, 2007 at 9:53 am
“then the question becomes, where does demand come from? if Buyer are totally discretionary (and act rationally) they will wait until house = (small $). But as we know, buyers are not rational ….”
You are assuming that everyone looks at homes at least partially as a financial investment, but there are other reasons for buying a home that are quite rational. But very few people are in a position where they can safely buy a home they know will drop in price: only those with a very large down payment or who can pay cash should be doing it around here right now.
50
Beth
// Dec 22, 2007 at 10:22 am
I heart pseudocode …
private String whatDoIHeart (boolean iHeartHouse) throws BankException{
Too much fun, at least to a geek like me. Perhaps this should be a scary comment on my persona … :-)
51
stephen
// Dec 22, 2007 at 10:35 am
It only becomes some big financial thing during bubbles. Normally a house is a very passive investment but since it is your home that’s OK. Personally I’m willing to pay a premium to own but hope to at least not lose much in the long run…
52
Jonny
// Dec 22, 2007 at 11:14 am
“only those with a very large down payment or who can pay cash should be doing it around here right now”
i would add that even these people should be prepared to keep the house for 10 or 15 years, unless of course money is meaningless to them.
53
Markor
// Dec 22, 2007 at 11:21 am
Good to know, thanks. Yeah I probably got ripped; it was an emergency replacement, so I didn’t shop around. I did get an expansion tank (I was told that’s code now), a new base to raise it up (my old one was shot), and disposal of the old unit.
54
Markor
// Dec 22, 2007 at 11:34 am
If its value drops 30% after you buy, you can find consolation in the fact that it’s still worth one comparable house (well, 90% of that anyway, after transaction costs).
55
Lake Hills Renter
// Dec 22, 2007 at 11:57 am
You guys still write code without unit tests? No test driven development? Design patterns? Mock objects? Cowboy code is so 2005. Get with the times!
56
Arizona Jack
// Dec 22, 2007 at 12:59 pm
Excellent video. You do NOT want to be overpriced out of the gate, especially in this market.
57
MisterBubble
// Dec 22, 2007 at 2:26 pm
The future of Seattle real estate?
How long until the Aurora block-housing ghettos are lost to the elements? Those townhomes will look beautiful with a few missing windows, I’m sure.
58
David McManus
// Dec 22, 2007 at 6:29 pm
“No test driven development?”
Nice theory, but never seen it actually WORK in practice, IMO.
59
3rd Generation
// Dec 22, 2007 at 8:09 pm
First, let me say that I have been lucky to have owned Eastside condos since the early 1980s’ when we had another Genius President (Carter) in office (13.3% non-owner occupied 30 year fixed mtg 11.82)… Second, let me thank the Eastsiders that have rented/bought them for me since the 80s’. I am told that I am now ‘wealthy’ on paper thanks to you wonderful folks. Again, thank you. Third, I lived in one of them in the early 90s’ while making a living in Eastern Washington, Great place to visit but the weather and stupid yuppies makes me suicidal. Fourth, I am Happy to finally view a video dumbed down to the level of Realtors and Real Estate ‘professionals’ - a sorry lot, on a good day and pathetic lot on a bad day…
When will they Get IT? Add value to your services and help your clients?
Live within your means. (generally) Play by the rules (use every loophole legally available, but in the end of all the pencil pushing, fly low UNDER the radar).
Jeezus, If a balding middle-aged not too attractive white guy with a regular sales job can amass way over a million dollar (almost all paid for, with big monthly cash flow) rental real estate portfolio in
60
economist
// Dec 22, 2007 at 11:17 pm
I’m not saying there won’t always be a premium to buy a house vs rent a house. But that premium will likely revert to historical norms.
The historical norm is that there is a premium to rent, just like there’s a premium to rent cars, skis, or anything else. That’s how the owners make a profit.
During the Great Depression that premium rose to twice the cost of buying, because people were afraid to buy or banks were afraid to lend.
Think about it.
61
economist
// Dec 22, 2007 at 11:24 pm
First, let me say that I have been lucky to have owned Eastside condos since the early 1980s’ when we had another Genius President (Carter) in office (13.3% non-owner occupied 30 year fixed mtg 11.82)
Carter left office in January 1981 and was succeeded by you know who.
The high interest rates in the 70’s and the early 80’s were a direct result of the inflation caused by the Vietnam War and OPEC. Carter appointed Fed Chairman Paul Volcker who used tight money to kill inflation and pave the way for the prosperity and lower interest rates of subsequent decades.
However Volcker did not have a long stay as Fed chair as who know who replaced him with Alan Greenspan, whose easy money policies have resulted in you know what.
62
Jonny
// Dec 22, 2007 at 11:58 pm
“That’s how the owners make a profit.
During the Great Depression that premium rose to twice the cost of buying, because people were afraid to buy or banks were afraid to lend.
Think about it.”
It’s all supply and demand. Doesn’t matter if owners make a profit to anyone. If there is too much supply, prices can even fall. There is no moral imperative that renting be at a premium. It’s not now and my rent would have to go up 50% AND prices would have to come down 50% before it would cost more to rent than buy. That would require a true second great depression.
63
economist
// Dec 23, 2007 at 12:19 am
There is no moral imperative that renting be at a premium
It’s not a moral imperative, dummy, it’s an economic imperative. One prices have stopped rising (like right now you know), nobody is going to buy a house to rent it out if they are going to lose money. And existing landlords are going to bail. A big chunk of demand (specuvestors) moves to the supply side.
64
johnnybigspenda
// Dec 23, 2007 at 1:33 am
I don’t see how someone renting from you is such a bad deal… even if you are cash flow negative by $200. If you have a 30 year fixed, you are SURE to go positive within 10 years. After that, (and including depreciation in the meantime) you are scott free on the dilly and someone is paying principal towards your mortgage. Ok , you put $50K down, after 30 years, your $250K place is now worth $500K. Thats a 7% plus return on 50K in an automated investment. Easy money… one trick: you need money to make money. Obviously there will be months where you won’t be able to rent the place or where the condo will be assessed for fix ups… no biggie if you have the cash.
65
MisterBubble
// Dec 23, 2007 at 2:05 am
66
MisterBubble
// Dec 23, 2007 at 2:07 am
(sigh…stupid blog software…)
A 50% gain in thirty years is only a 1.4% annual return, genius. You could do better by putting your money in a savings account. And that doesn’t take into account interest on the “dilly”, which is going to run you 6-7% per year.
67
MisterBubble
// Dec 23, 2007 at 2:15 am
(sigh…stupid MisterBubble, posting too quickly…)
100% gain, 30 years = 2.3% annualized return. You’re still doing better with a savings account.
68
economist
// Dec 23, 2007 at 5:33 am
even if you are cash flow negative by $200. If you have a 30 year fixed, you are SURE to go positive within 10 years
I (and most others on this board I think) would have no problem buying a house that is cash flow negative (opportunity cost vs renting) by $200/month because as you say inflation will turn things around in due course.
The problem is you left out a zero. The cash flow deficiency today is an order of magnitude higher, which means it may never be made up on a present discounted value basis.
69
johnnybigspenda
// Dec 23, 2007 at 9:30 am
mister bubble your math is all wrong dude.
first of all, I only invested $50K and I receive $500K after 30 years. minus the $200/month negative cashflow (since all other costs are covered by the renter)…. thus the 7% annual return.
i would be shocked if places only double in value over the next 30 years… and yes, my cost basis is from 2004, so I’m not including what the place is probably worth today… in case you’re just about to say, don’t forget the 30% discount your place is going to take over the next 4 years… I’d be up 30% plus today…
70
johnnybigspenda
// Dec 23, 2007 at 9:41 am
I didn’t even take into account that it would likely go cashflow positive within 10 years, lets say 15 to be safe… my ror goes way past 7% after that.
71
Lake Hills Renter
// Dec 23, 2007 at 10:39 am
“rd TDD: Nice theory, but never seen it actually WORK in practice, IMO.”
Wow, It has completely revolutionized how my team codes. Unit tests using TDD, mock objects and design patterns has dropped our bugs by more than 90% and has made our apps much easier to modify and expand later on. I can’t imagine ever going back to hack coding.
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economist
// Dec 23, 2007 at 10:51 am
I didn’t even take into account that it would likely go cashflow positive within 10 years
You can’t just add up all your annual cash flows to see whether you come out ahead or not. You have compound the cash flow forward (or discount backward) by the interest rate. $1000 lost today is worth 1000*(1.06^30) = $5743 30 years from now (assuming you’re paying 6% to borrow). That’s why early cash flow deficiencies are so costly.
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Ashley Nichols
// Dec 23, 2007 at 11:21 am
This video is awesome. We just sold a property in a difficult market (Nevada) that started at $305k, and we cut the price $5k - $10k every week in a declining market until it sold. In the end - it sold with a “special” $10k discount since the buyer did not have a 3% real estate agent. Pricing is the key to whether a home sells. Not staging, decor, etc. Those things help - but the end buyers want the right price that hits their level.
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EconE
// Dec 23, 2007 at 12:47 pm
JohnnyBigSpenda…
can you run some numbers for me?
The new downtown condo I rent was purchased presale at a smidge over 500k. (Comps are asking 549k and 599k by flippers that are currently losing money)
Dues are 450+/mo.
Taxes are whatever they would be on 500k.
I rent for 1667/mo.
How much is the negative cash-flow for my LL?
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Markor
// Dec 23, 2007 at 1:16 pm
Plus renters with cash would have to secure it themselves, since banks were out of commission. Where are you going to hide it when your landlord not only has a key to your place, but also the incentive to look for your cash?
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EconE
// Dec 23, 2007 at 4:11 pm
So…first it’s…
“You’d better not rent because your landlord will increase your rent”
now it’s…
“You’d better not rent because your landlord will come in and rob you”
good one Markor…for a laugh that is…
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deejayoh
// Dec 23, 2007 at 4:51 pm
is that the nice way of saying that property values dropped in half? perhaps you have the ratio right, but I think you have the cause wrong
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Denny Retrograde
// Dec 23, 2007 at 6:02 pm
Bingo, deejayoh. Thanks for thinking that one through!
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MisterBubble
// Dec 23, 2007 at 6:46 pm
A 30-year fixed on a $200,000 loan at 6.5% is going to run about $1900 a month. Once you factor in taxes, insurance, maintenance, etc., you’re easily looking at $2500 per month. Good luck finding a renter who’s going to part with that every month, in a town where 90% of the rentals go for less than $1500 per month.
But hey, I’ll come play with you in the land of make-believe for a little while: let’s assume that you can find that mythical fool who is willing to pay a 50% premium to live in your house (or more likely, a large selection of fools, since at that rent range, your target market is college kids who are going to live 5-up at $500 a pop — hope you like bongwater, “dude”). Under the rosiest possible scenario, after 30 years of ruined carpets and clogged toilets (“I swear, dude, I don’t know who tried to flush that pillow!”), you’ll have turned your initial $50,000 investment into $500,000 — a 10x increase (1000%), for an annualized gain of about 8%.
Meanwhile, you have to pay to live somewhere, and I’m guessing that will mean another mortgage (I’m assuming, here — you don’t seem smart enough to rent). So, you’ll lose the interest, taxes, insurance, etc. on that property, instead of your “investment”. Six of one…
Bottom line: after thirty years, under the rosiest possible scenario, you’ll have earned 8% annualized on your original $50k, a performance that is entirely mediocre, by any standard. Investing in an index fund will do about as well, with substantially less risk.
If on the other hand, you assume sane rents, then my original numbers are closer to the truth. You’ll pay a good chunk of the $380,000 in interest payments you’ll owe over the life of the loan, and that will significantly cut into your profits, “dude.”
80
economist
// Dec 23, 2007 at 7:25 pm
is that the nice way of saying that property values dropped in half? perhaps you have the ratio right, but I think you have the cause wrong
I didn’t say that rents went up. I said that the rental premium, which is the ratio of rent to the cost of purchasing, went up. In fact nominal rents went down in many places.
And I didn’t say that the rental premium doubled, I said that it moved up to around 2. Historically it was greater than 1 as I pointed out previously.
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johnnybigspenda
// Dec 23, 2007 at 8:10 pm
mr. bubble…
first off a $200K 30 year mortgage at 6.5% is about $1250 a month. Plus dues of $400 is $1650. Lets say its a 2BR. $1400 is not too hard to get these days if you aren’t renting a slum. ($1650 would probably be achievable… but lets be conservative just for argument’s sake)
To get to $500K from $250K requires a whopping 2.34% annual appreciation. (ok, we will have a couple of tough years coming up). Everyone here seems to agree that we will return to the ‘norm’ probably within the next 5 years. That leaves 25 years of ‘average’ realestate appreciation which is probably above 2.34%.
Ok, so you price in some risk and use conservative estimates, take out the opportunity cost of those $200/month cash payments for the first 5-10 years and bing, I’ll take 8% on that 50K all said. (I think its going to be more like 9-10%… which only requires an average yearly appreciation of 3.5%)
We can agreee to disagree if you like, but $200/month isn’t going to sink my boat any time soon (and it certainly won’t hinder me from buying another place).
Everyone beleives that things won’t get better for a long time. As soon as people think it might get better, you already missed your buying opp. This board is a great barometer for market psychology… i’d say its a little more negative than average, but still useful when you are trying to understand what ‘everyone else’ is thinking.
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economist
// Dec 23, 2007 at 9:22 pm
This board is a great barometer for market psychology… i’d say its a little more negative than average, but still useful when you are trying to understand what ‘everyone else’ is thinking.
Are you joking? Market psychology is what J6P thinks, not what a few Net intellectuals think. If the people on this board were representative of the market as a whole, houses would be selling for rent equivalence NOW.
The barometer for market psychology is the market itself. That’s what people are willing and able to pay.
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Roger
// Dec 23, 2007 at 9:57 pm
In 30 years of owning a condo, you can expect a least a couple and probably more likely several “special assessments” of several thousand dollars apiece. The roof over the entire complex will need replacing, your appliances will probably have to be replaced twice, the exterior will need painting at least twice, the roadways will possibly have to be resurfaced once, not to mention whatever damage your tenants to to your particular unit. You are also not factoring in taxes at 1.x% of the appraised value, which is an additional $210 a month to start, plus insurance which is probably another three-figure number.
Which isn’t to say a lot of people don’t do OK in rentals, but I don’t think the particular scenario you lay out is realistic. I think your monthly expenses are closer to $2,000. Plus you will probably have one month every two or three years where you don’t have a tenant, that’s 8% less cash that particular year.
A friend had special assessments of $5,000, $3,000 and $7,000 in the ten years he lived in his condo.
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MisterBubble
// Dec 24, 2007 at 4:26 am
Bah, you’re right. For some reason, the loan calculator I was using was bumping the loan value to $300k. A $200k loan is at 6.5% $1264 per month. But the rest of the analysis remains the same — you’re still not considering taxes, insurance, or maintenance.
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