real-estate

The wrong way to make housing more affordable

by John Rice

I keep seeing a bit of enthusiasm in the media regarding the market softening to the point that real estate prices will drop.

With the logic of a 5 year old, sure, it makes sense that lower prices make things more affordable. There are however more variables that go into a mortgage payment. There is the price you pay, your interest rate and the length of your loan. There is another variable independent of real estate and that is wages. I read this morning that wages are going up as workers are demanding more income to combat inflation. I predicted this. Inflation came first and hurt all of us. I knew that in time, wages would have to go up as well. I used to have a lawn care business when I was younger. I remember a customer who built their house brand new in the 1960s. They told me their payment was something like $160 a month and some months it was hard to make ends meet. We laugh at that payment today, but keep in mind that it was probably still about 30% or more of their income.

Let’s say that we all wake up tomorrow and real estate prices have dropped 20%. Yay affordability!! It won’t make a bit of difference. Why? Having lived through the Great Recession, I can tell you that Buyers will not view this as an opportunity. They will be afraid to buy. The self claimed shrewd Buyers will try to time the market and wait for prices to go down more. Those Buyers usually end up waiting so long that prices have started to rebound before they feel comfortable to pull the trigger.

Let’s also take into consideration what softening real estate prices will do to those who already own a home, which ultimately affects everybody. For most middle class folk, their home is their greatest asset. If they feel good about the value of their home and their job security, they will go out and spend their money. They take vacations. They go to Lowe’s and Home Depot. They buy furniture. They spend on landscaping. It’s good for the whole economy. They stop all that when the value of their home goes down. How do I know? I saw it from 2007-2011.

What is the solution? Build more houses. We have been in a housing shortage since the Great Recession ended. Yes, people right now are not moving since they got super low rates that don’t exist anymore. That is keeping prices high in these times of higher rates. But think back. When rates were super low and everybody was eager to buy houses, we still didn’t have enough houses available.

And if you think affordability and low inventory are bad now, just wait until rates drop down to around 6% or hopefully less. That will create a bit of a frenzy. There will be even more bidding wars and prices will continue to go up, making housing less affordable.

Should you buy that updated house?

by John Rice

It is soooo easy right now to sell a pretty house. Always has been but when there is so little for sale, it is especially easy.

You know the formula: White shaker cabinets, quartz tops, lots of trim, paint as much black as you can, etc.

I get it. Those houses are so pretty. The problem is that a house that’s only attraction is its pretty new finishes might not be a good enough reason to buy it.

I blogged a few weeks ago about a former Airbnb house I showed that sold for way over list price and got a crazy amount of offers. I pointed out to my buyer several things showing it wasn’t all that great of a house. The driveway was sort of steep and in bad shape. The old wood windows needed reglazed. It wasn’t really that great of a house, it was just pretty and most of what made it attractive was the furniture that didn’t stay with the house.

It is great if you get a pretty house but that isn’t enough of a reason to buy it.

At its core, whatever house you buy needs to have more than trendy finishes going for it. Why? Because one day those fancy finishes will either be out of style or worn out and you’ll be left with a house that doesn’t even have one great feature anymore.

Here is how to pick a house:

  1. Most important thing is a good location. I know that phrase that is thrown around a lot, but a good location can mean any reason that spot is desirable. It can be because it is close to something, far away from something, be in a desirable school district, be close to highway access, or just anything that makes it more desirable than somewhere else.
  2. If a house passes that test, then examine the lot. You want the lot to be equal to the others in the neighborhood or be better. Flatter is usually more desirable. Less slope on the driveway is usually better.
  3. Then think about the floor plan. It needs to be functional and fit in with the neighborhood. If you have a closed off floor plan in a neighborhood where most are open concept, then it might be harder to sell in a softer market. If something is odd about the floor plan to you, it will be odd to future buyers as well.

Where do those fancy finishes come into consideration? At the very end. It is always easier to put fancy finishes in any house than it is to change the location, lot or floor plan. If you have an outdated house in a good location with a good lot and a good floor plan, you still have a house that will always be desirable.

“Are any of the offers cash?”

by John Rice

I went to an open house with a buyer client this past Sunday. We were already out looking at two other listings. This one had an open house so I thought we’d hit it rather than schedule a time to see it before or afterwards.

We got there about 5 minutes early. The realtors were not there yet and there was a line of people waiting to get in.

Once the realtors opened the house, the first thing I asked was how many offers did they have. One of the two that were there said they had 10 offers and were expecting more.

I then asked if any of them were cash. One of the realtors said “We aren’t allowed to say whether or not we do.” That isn’t exactly true in general. It could be that the seller instructed them not to disclose that type of info. If that was the case, kudos to the seller’s realtor for saying this.

But more than likely, they just didn’t want to say.

Why would they not want to say?

Because if there were any cash offers, disclosing so would deter any buyer who would be financing the purchase from making offers. What these realtors want to do is get as many offers as they can, hoping to get one with a higher price or better terms than the cash offer, then go to the realtor with the cash buyer and say “If you can match these terms from the better offers, your buyer can have the house.” Nothing at all wrong with that. They are representing their client’s best interest in doing so. It is what I would do for my sellers as well.

These two realtors were a lot of fun. I enjoyed meeting them. They didn’t know I was a realtor at first, so my response was “Don’t worry about it, I’m a realtor too and I can read between the lines.”

So yes, they did have at least one cash offer.

Should you buy that unique home you fell in love with?

by John Rice

So, you’ve found a house you’ve fallen in love with. It’s sort of out of the mainstream. Maybe it has something strange like an elevator in the bathroom or a kitchen addition shaped like an octagonal spaceship? Whatever it is, you love it and you’re wondering if you should buy it.

The answer is yes. Yes, you should buy it. A house is an investment so you want to make a good financial decision, but it is also an investment in your happiness.

However, there are some things to realize and take into consideration before you do.

The main thing you want to avoid is overpaying for it. Most houses like I am talking about tend to have limited appeal in the broader market. It can be difficult to determine the market value since it is nothing like the comparable sales in the area that a realtor or appraiser would use. It takes a bit more of a gut feeling than hard science to figure it out.

Realize that when it comes time for you to sell it, it might take longer. You’ll be waiting for somebody just like you who cherishes all its quirks and features. The good thing about this type of house is that once you find that person, they usually don’t have a back up plan. They aren’t interested in any other house on the market.

Many years ago, I had a very unique home listed. It was an old house that had been totally renovated inside. It looked old on the outside but new on the inside. It was in town but it had 3 acres and felt like a mini-farm. The primary bedroom was “Open concept.” There was no door going to the upstairs primary bedroom. You just walked up the stairs and just like that, you were IN the bedroom once you took that last step. Also totally open was the bathroom. Like, the shower and even the toilet were just sitting there visible from the top of the staircase and from any vantage point in the bedroom. It took forever to sell. The buyers said they had been looking for a long time and fell in love with this place. They had to have it. Literally probably 100 other buyers had given it a very hard pass. That is just how it goes with unique houses.

That’s all I got. Buy it right. Go in knowing it might not be easy to sell. Enjoy your stay in the house between those two points in time.

Airbnbust?

by John Rice

One of the most valuable lessons I learned from my dad is how cycles work.

I remember one of the first times I ever thought about such things was when we lived in a starter home neighborhood in Frankfort. I remember him telling me that the houses in our neighborhood would eventually get run down because everybody who buys such an entry level home only plans to stay there for a few years. You don’t do a room addition, kitchen renovation or anything when you’re thinking so short term. Forty years later, the neighborhood is pretty run down. Houses only got fixed up when the values got so low that an investor could buy them cheap enough to make a profit.

Another thing I learned about cycles is to expect them. There will be good times. There will be bad times. Most people view the good times as the norm and are shocked when bad times come.

We are there now with the short term rental market.

Over the past few years, I’ve had several clients ask me about getting into the STR (Short term rental) market. I have always been cautiously optimistic. I tell them sure, you can make some money, but have a backup plan because one day, the market will be saturated and/or demand will not be as strong. We had several things line up perfectly all at once to create the buzz for short term rentals. We had many people wanting to travel after the pandemic, we had a robust economy, and we had people eager to try using an Airbnb. I knew that would not last forever, especially with so many so eager to buy a house and use it for short term rentals.

The downside of the cycle is happening now. I am on a facebook group for real estate investors. Just about everybody is saying their bookings are waaaaaaay down compared to last year. We have several things that have lined up but none of them are good: Everybody travelled a lot after the pandemic and demand is down, we have a not-so-robust economy, and people are a little more cautious of short term rentals (Excessive fees, terrible hosts, pretty houses in scary areas, etc.)

In time, demand will pick up. Those who were merely Airbnb hobbyists will get out of the market leaving only those who view it as a serious business. This is part of a cycle too.

So what’s my advice to anybody wanting to buy real estate for STRs? Have a backup plan. Make sure the numbers also work as a long term rentals. Be ready to pivot when needed. Buy a property that is a good investment. Don’t buy a terrible house in a slummy neighborhood where the only desirable feature would be your trendy decor. Have an exit plan because one day you will be as excited to sell your property as you were the day you bought it.