1.  You are an investor with a long term view to acquire properties that should appreciate during the next cycle while cash flowing in the short term.   Great investors don’t buy in hot markets, they buy when no one else wants to.  In Denver, one of the best deals of this type are in close proximity to current and planned transit oriented developments all across the city. Check out the Overland neighborhood of Denver and the University Hills neighborhood.

2.  You are not a current home owner and have good credit.  You sir/or maam are a hot commodity.  You should take advantage of that.  The smart money may realize that the current low interest rates on mortgages + downward pressure on home values = A great deal.   You have a chance to ‘lock in’ a payment for your living space.  Your rent in many areas of Denver is expected to rise along with inflation and eventually demand.  Inflation when you own a home is a good thing.  In many ways, inflation can actually help the home owner.  The payments over time ‘seem’ more affordable as competitive wages adjust to the cost of living changes.  In addition, home values traditionally keep pace with inflation over the long term.  By picking the right area, you can combine the gains from inflation with actual appreciation that comes when an area is revitalized (Gates redevelopment in Southeast Denver, Platte Park) or business moves into the area (Check out the Fitzsimmons area of Aurora).

3.  You need a place to live.  Sure you could rent a place, but you’ll soon be back in  the same situation again.  Many homeowners will now be open to leasing a home with the option to buy it.  This is rarely an option in a hot market.

4.  Your current home is inadequate.  Often, you just need to make a move.  In this case, the overall market just doesn’t matter.  When you sell a home and buy a home in a similar market, it’s likely that the value that you think you are losing is balanced when you consider both sides of the home equation.  The increased inventory can make it hard to sell but it can be also give you more choice when its your turn to buy.

5.  You just want a good deal.  Good deals are to be had if you know where to look.  If you want a good deal, buy a home in a market that is continuing to appreciate even now.  For example, Denver Highlands up 10%.  “But I thought this was a buyer’s market”.  Or buy in an area that you expect to recover first such as DU, Rosedale, Washington Park.  These are all close to the popular parks, nightlife, and of course Denver University while still having easy access to downtown and the Denver Tech Center.  Trying to locate a foreclosure deal in one of these neighborhoods is highly unlikely.  Rather than looking elsewhere at foreclosure in depreciating areas, buy the best VALUE in the best neighborhoods that you can afford.  Now that would be a good deal.

The media loves to overstate fact in order to generate some fear.  They love to stumble across the financial equivalent of the ’if it bleeds it leads’ statement targeted to get the public to stop and stare.  Scared out of their wallets, afraid to make a move.   Combined with their love to oversimplify, they start getting dangerous.  They love to pretend their audience isn’t intelligent enough to make their own decisions.  Instead, they make the decisions for you.  That’s not conducive to good investing in housing or otherwise.   Most investors know they can’t just buy the stocks that get hyped each day on CNBC.  They know they need to dig a little deeper.  Sometimes when most people are saying sell, that’s when you need to be buying.

Real estate can be just as complicated as the stock market but thankfully, real estate moves a little slower.  There’s a lot more real estate markets and homes out there than all the stocks that Mr. Cramer claims to have in his head. (I think he’s claiming 2000…)  Certainly, the opportunities in housing have to exist.  I know what and where they are in my area and I’m sure if you work hard enough, you’ll find them in your area too.  

Anyway,  Cramer was on his show yesterday and mentioned that with the rate cuts, he thinks it could be a good time to buy a house again.   Funny part is that, during the time between his first public denunciation of real estate and his recent reprieve, not much has changed in Denver or anywhere else.  Just the Fed’s interest rates.  Mortgage rates will eventually follow but truth is they weren’t bad three months ago.  Some of the outlying areas of Denver will have some issues with the foreclosures, that hasn’t changed.  Maybe the only thing that changed is the fact that media feels it needs to put a new twist on the news.  

 For the most part, the new urbanism movement in Northwest and Southeast Denver has helped those areas of the city through most of the slump.  In fact, I pity the people that passed on the home they wanted in these areas based on news that they should be waiting for a better deal.   Most buyers are looking for the 20% price reduction that will never come.   It’s their loss.  I’ve said it before.  The rest of the country’s problem isn’t necessarily Denver’s problem.   We are not immune from the problems but all the factors that contribute to a strong local economy are still in place.   So don’t get worked up when you hear incredibly outlandish statements saying to ‘do this’ or ’don’t do that’.   There are always opportunities if you know where to look.  I’m sure a sane Jim Cramer would admit to that.

 …have you ever noticed Mona Lisa’s wandering eye?  Maybe she spotted a deal over the artist’s shoulder.

I think the Wall Street adage is, “Bulls make money, Bears make money, Pigs get slaughtered.”

In my opinion there are only three actions a smart trader would take:  

1. Absolutely nothing.  No reason to buy or sell right then.  Plenty of reasons to wait for the volatility to decrease.  Double check your facts and assumptions based off the new information and revisit the stock later.
2. Short term day trade.  Very Very Short term.  A little risky but to some a drastic, yet predictable, price move could mean a pretty penny.  
3. A move to safer ground seeing that the Fed has reaffirmed that yes, things are slightly less rosy than when they made their emergency rate cut.  Thus, when you see your position spike for no good reason, you’d sell and get into something else…or maybe take your position down and wait until tomorrow.

Now, I’m not a economist or even a stock market analyst, so don’t get too worked up if you understand this much better than I do.  I know this is an oversimplification, but my understanding is that rate cuts are applied when the economy is slowing down.  So when the seven economist types that sit on the Federal Reserve Board of Directors get together, and six of them vote to cut rates by a half a point,  my take away on that would be some concern that there could be some problems in the short term with the economy.  Problems with the economy usually doesn’t bode well for most stocks.  At least until the stocks account for the expectations in the stock price.  So when I see a rally like I saw at 2 P.M today, I try to think about what the people were actually thinking.  The truth is, the people that were buying weren’t really thinking. 

Those that were buying, for the most part, were buying based off emotion.  That’s pretty dangerous when you’re making a purchase.  Whether it’s a stock or a new home, it’s a safe bet that you should only make the purchase if you really understand what’s going on.  What is the asset worth?  Do I need to buy it now?  What’s the advantage of buying right now?  If I wait, do I miss an opportunity or will I pick it up next week cheaper?  Do your homework.   For the stocks today, the simple explanation of it is that everyone expected that there was going to be a 50 basis point cut today.  They’ve expected it for weeks.   It’s been so expected that it’s already priced into the stocks.  So when the Dow Jones Industrial average goes up 226 points without any real basis for it, and especially since the underlying factors actually suggest some negativity in the underlying assets, the smart money that already owned the stock would probably sell,  right? 

A study released on October 31,2007 by S&P Case-Shiller shows Denver leading the country in price appreciation.  While the numbers are not staggering, Denver’s subtle growth marks a stark contrast from the drastic price drops of other cities across the United States.

  The study measures changes in price of a single home that is sold twice over a period of time.  The Case/Shiller method is considered to be one of the most accurate ways to measure valuation changes over time.

 Most of Denver’s price growth actually happened prior to 2000 while Denver’s economy was growing hand over fist.  Denver’s growth since 2000 has lagged behind other major cities that have garnered national attention as speculative buying and building pushed home prices to new highs.   When Denver’s economy suffered from the tech crash in 2001, many cities with diversified economies rolled on.  Cities across the country were reaching for new highs as Denver was finding it’s foothold. 

    Denver’s home values have not extended significantly past what the local populations can afford and are willing to pay.  That is why you haven’t seen the drastic price drops.  Are the prices high?  Could be.  The suburbs have shown some slowing becuase of competition from new construction.  Some parts of the cities didn’t have any justifiable reason for a growth in price since there were no improvements or changes in the areas.  Much of Denver has gone through a reniacance of sorts.  Small areas of commercial interest have been revamped to create value in the the surrounding neighborhoods.   The areas that haven’t seen this sort of investment and increased interest have faltered now that the going has gotten tough.  As a whole and without seeing a real reason related to the local economy, I don’t see any reason that Denver won’t at the very least keep pace with inflation. 

  In many other cities, home values have extended beyond what the local economies can support.  When that happens, the market slows down until the local economy can support the growth.   Without a growing economy and investments in the area, there is simply no good reason to see growth beyond that of inflation. 

  In the City of Denver there have been lots of changes.    Lots of investments in local businesses and a strengthening economy equate to a stronger demand for housing.  Just because a few home owners got in over their heads with loans they probably shouldn’t of got, should the rest of Denver residents lump themselves in with what’s being said about real estate from the rest of the country?  I don’t believe so. 

  It is far too early to tell how much Denver will continue to be affected by the continued negative media coverage but it is apparent that problems that are facing the rest of the country are not the same as the problems facing Denver.    It’s hard to believe that people in Miami, Los Angeles or Las Vegas could even think that their growth could be sustainable.

    Thus the old adage, “All real estate is local.” 

Here’s essentially how they work with stocks.

On the lower part of the image is an example of a slow stochastic. A buy signal is interpreted when the %k (green line) crosses up over the %d (white line). This is most important when value is crossing up from 30. A sell signal is the opposite. When %k is crossing down over %d from 75 (numbers on left). Go ahead and ignore the right numbers and red line for now. Essentially stochastics are trailing indicators of price trends. Trading decisions should never be made entirely from an indicator. It’s just an illustration of a trend over a time period. Depending on the time period you’re looking at, long-term and short-term trends can be identified.

Now, that being said. Here’s a slow stochastic showing short term (seasonal) market trends for the Denver Real Estate Market.

The stochastic demonstrates the change in price trends

, I smoothed the d by averaging 3 months of k. K represents a 3 month period. The price change may be subtle but savings of around 10k could be possible over the same house in the middle of summer. The change in color highlights where the trends change. You’ll notice that July of 2005 to February of 2006 was the longest down trend in recent history while November of 2006 was an earlier change trend change than usual. You’ll notice that the number of homes that sells varies greatly with the season. Periods of increased demand similar to 2004, demonstrate higher levels of homes sold in the spring and fall. Markets also vary greatly even within a city so it would be interesting to see how this worked in specific subdivisions. I’m also going to look into whether income properties differ from the residential home listings shown.

Feel free to contact me if you have any questions.

Technorati Tags: Denver, Real, Estate, Market, Timing, Stochastic, Price, Home, Value

This “gem” is from a recent Craigslist post by an owner trying to FSBO his home. I’m always on the lookout for a fix-n-flip, but I think I’m going to pass on this one.

It’s important in real estate investing to know your limits. Figure out the type and size of project that you would be willing to take on before you start looking. Otherwise, you’ll rush yourself and overlook obvious things just because you’re so anxious to get started.

I bought a creepy home once. It sent chills down my spine every time I walked through the door. I would buy a lot of different homes, homes that need work, homes with structural damage, homes with bad neighbors or even backing to a busy street. But from now on, I’m going to draw the line at creepy.

Technorati Tags: Real, Estate, FSBO, Creepy, home

What is a home really worth?

There is going to be a difference between what you would be willing to pay and what somebody else is willing to pay. Would I buy a home if I can rent a home in the same neighborhood for half the monthly cost? How highly do I esteem the large yard? Is it more work or a great place for the kids to play? The value of the home really comes down to what it’s worth to you.

We all know that appraisals don’t really mean anything. There is a wide range that homes could be worth depending on how long the seller is willing to wait for that one buyer. The appraisal exists for the sole purpose of the lender understanding the risk to their money. If the price can be supported, they lend the money. This is actually quite different than value from the perception of a buyer. Value is the perception that somebody has about a property based on their own personal views.

The most important factor in your house purchase is knowing if the house is what you want. Buying something because you couldn’t find anything better is different than finding your dream home in your price range. On just your average home, you might take some negotiating risks that you wouldn’t if it was the neighbor’s home you have coveted for the last 10 years.

When I buy a home, this is my list I go through.

1. How long do I plan to live here?
2. If it’s been on the market awhile, why hasn’t it sold?
3. What is the neighborhood doing? Is it stable or improving?
4. Does the home need work? How much?
5. Can I improve the home to add value?
6. Could I rent it for my mortgage? What are homes in the area renting for?
7. What are similar homes on the market listed for, and what have they sold for?
8. From what I observed on the property, what seems to be the situation or motivation of the seller?
9. From property records, what does the seller owe?
10. If that was my house, how much would I expect to walk away with?
11. What are typical offers in my area with regards to contingencies and concessions?
12. What is the average sold price to list price ratio?
13. What concessions do I need to get, if any?
14. Do I need any contingencies?
15. Do I really want this house?

Once I’ve decided what it’s worth to me, I’ve established the most I’d be willing to pay for a home. Sometimes, this is actually higher than the asking price, but again that depends on the property, the situation, and the market conditions. Some buyers are so nervous about paying too much that they’ll let a price difference of less than a couple hundred dollars keep them from closing the deal. In most cases this comes down to the fact that most people can’t suffer the blow to their ego that may come if they don’t WIN the negotiation. Some people feel that if their offer isn’t countered then they didn’t get everything they could have out of the seller. Some people are more concerned about how much less they get under the asking price rather than whether or not it’s actually a good deal.

What is a good deal?

I’ve seen a lot of suggestions saying that home builders are offering great discounts and upgrades on their properties, so that is where you should look for a home in this buyer’s market. You should still ask yourself, “Is it actually worth it?” Just because you get a home for less than what someone was asking for it doesn’t mean it was a good deal. Even if you paid more than the asking price doesn’t mean you got a bad deal.
In Denver, homes usually sell within 3% of the final list price. But homes usually sit on the market until they’re 10% lower than their original list price. This says a lot about how the seller’s idea of value is different than a buyer’s. It takes time for sellers to come to the realization that their homes aren’t worth their list price and lower the price. Because of this separation between buyers and sellers, I remind my buyers that if the most they want to pay is 10% less than the list price, it’s highly unlikely that the offer will even be considered. In the Denver market 10% can easily be $30,000. Most of the time, the seller actually feels like he’s losing that much money if he accepted that offer.
Remember, a home will almost always sell for what it’s really worth. Don’t let the fact that you have been psychologically anchored to some advertised list price be the strongest influence on your perceived value.

So what happens when you just write low offers on homes? If the home is actually worth the list price, the home is probably getting showings from other buyers. When your low offer comes in, the listing agent leverages it with other interested parties to get a better offer for his seller. It is my recommendation to make your first offer just below what you think the seller’s minimum sell price is. It’s just close enough that you will at least get a counter and who knows, if they’re desperate enough they just might take it.

Some other top negotiators suggest the following. Say a home is listed at $200,000 and you want to make an offer. You would like to end up at $195,000. If you offer $189,000, you might end up settling at the $195,000 because you have given the seller the opportunity to WIN. This is probably the most typical approach to negotiation, but it doesn’t always work, especially if your initial offer is so low that even if you split the price difference it still wouldn’t be acceptable. I find that if you offer too low, you often just get some sort of cursory price drop of a thousand or so. This isn’t helpful and just creates ill feelings with the seller who might not feel like considering any of your offers in the future.
Of course, there may be evidence that the home has been for sale for a long time. Perhaps there are foundation issues that aren’t reflected in the price. By pointing out the issues of the home along with your low offer, you could possibly get the home for less than asking price. But again, you have to ask yourself, if I get it for a low price, is it still a good deal?

When it come to concessions and contingencies, I try to keep it simple. The more you ask for, the weaker your offer seems. The seller may personally have a problem with paying your $3,000 in closing costs but that same seller may have been willing to give up his house for $6,000 less than your offer. Sellers are funny like that. If you want a concession, ask for it upfront and ask for a little more than you need. Try to negotiate the price as something separate than the concessions.
When I make an offer, I have already gone through all my questions. I know exactly what it’s worth to me. If that price is within 5%-10% of the list price then I consider making an offer. I write offers that could conceivably be accepted as is. I make sure I start negotiations in the ballpark. I negotiate hard on a home to get it below my max price but if I really want the house, I’m not afraid to pay for it.

Other posts: All Denver Homes are Overpriced

Technorati Tags: Real, estate, home, value, offer, negotiations, low_ball