What should you think about before you buy real estate? The market is right for the purchase, but how does one choose real estate as an investment?
Three types of buyers will be addressed:
--- The buyer who is purchasing a "dream home" to live in forever.
--- The buyer who is purchasing a home to live in for two to four years.
--- The investor looking to rent the property and hold for a long term.
Long-term
For the long-term purchase of your dream home, look at the old adage -- location, location, location. But what else is necessary? One becomes emotional about the purchase of a home that he or she will live in for a long period of time.
If you are quite certain that this is a long-term purchase, then go with what you like in location, floor plan and amenities. The price will be right if you have your agent pull the last sales and comparable listings in the neighborhood, and you negotiate with this information at hand.
It is hard to go wrong in a buyer's market if you are going to stay in this home for many years.
For those in professions such as teachers, firefighters and police officers, there are wonderful programs offering 100 percent financing with excellent low-interest rates.
Shorter-term
There are some proven formulas for guidance for those buyers who will be living in their home for only two to four years. This buyer must look carefully at the home purchase to safeguard the investment, knowing that resale is a possibility within the next few years. This buyer needs to compromise the emotion for the practical aspect of an investment purchase.
There is the ratio of land to building. This sounds more difficult than it is, but the ratio of land to building on a typical home should be 25 percent land to 75 percent improvements. This does not hold for waterfront or more valuable property. A 50 percent/50 percent ratio is used in this category.
The rationale for this ratio of 25 percent land to 75 percent improvements is the fact that land typically does not depreciate over time, but improvements do depreciate (they age). If you are buying the most expensive home in a neighborhood, when you go to sell, it will be more difficult, and you may not have made a wise investment, unless your purchase was a great deal. Stay with the idea of purchasing the least expensive home in the most expensive neighborhood that you can comfortably afford. Most likely, your ratio of land to value will be within the 25 percent to 75 percent range.
If you are building a new home, it is easy to follow this formula: If your lot price is $100,000, then your improvements should not go more than $300,000, for a total package price of $400,000. If you "overimprove," it is more difficult to protect your investment if you must sell your home.
Many new subdivisions host the premium builders to feature their spectacular home. This is the time to purchase those spec homes, as the price probably has dropped more to the 25 percent to 75 percent ratio, even though the home costs more than 75 percent of the land cost to build.
In essence, when you purchase these homes at today's prices, you might very well be getting all of the extra custom features for no cost or minimal costs.
Check the popular number of bedrooms. For instance a four-bedroom pool home usually is the hottest seller on the market in most areas.
Stay clear of "locational objections," such as backing up to busy streets or having commercial property abutting your investment.
Make this purchase a clear, popular, calculated choice.
Investment rentals
Investment rental property is another challenge. I used to consider putting aside three times the payment on a rental property for vacancy when the property is not rented. Now, I direct an investor to hold three times the payment for repairs/assessments and six times the payment for possible vacancy -- a total of nine months' carrying costs for this property.
The market is a tenant's market also. Many past investors could not sell their properties, so they have rented them, thus flooding the rental market. This market is soft -- that is, still a buyer's market -- but changing slightly as each month passes.
Be conservative in selecting an investment. Seek information on future taxes and assessments, and project maximum insurance costs. If the negative cash flow shows a promise for future market appreciation, and you, as an investor, are here for the five years' or longer stay, then go for it. The time is right.
Many of the negative features -- such as the negative cash flow, high insurance and taxes -- are forecasted to be reduced in the years to come, but do not count on it. Play this in a conservative manner, and you most likely will profit.
Second-home markets are ripe for purchases. Condominiums are still, in most cases, in abundance, so begin your study of the real estate market now, and do not wait too long to purchase. Interest rates are low, and the values are incredible at this time.
Sunday, February 17, 2008
Sunday, February 10, 2008
Brevard market starting to equalize.
The term "equalization," as it relates to real estate, may be a new one to you.
I believe this is a process that is just beginning to take place in the real estate community throughout Brevard County. Our market has been extremely volatile. Our prices were sky-high in 2005, dropped in 2006, and fell even lower in 2007.
Where are we going in 2008?
In my professional opinion, as a broker, we are at the point of the beginning of "equalization."
Every office has seen offers lower than one-half the list price of a home. A seller, who needed to sell, may have dropped his or her price to a midrange from the initial offer and sold.
Those sales all are a matter of public record, and one has access to this information through the Brevard County Property Appraiser's Web site. In the past, when a seller saw the recorded sale or heard of the low sale price, if one were smart, he or she did one of two things: Removed the home from the market or dropped the price to compete for the buyers in the market. At this time, the majority of listings are beginning to be priced competitively -- that is, sellers have begun to realize they must price their home with today's prices, not those of years' past.
A buyer can easily see competitive homes in the area, which may still be overpriced. It also should be apparent to a buyer which homes may be priced "right." At this point, the buyers in the market have heard of the low prices that sellers were accepting, but the buyers may not be in tune with a slight change in the market.
The process of equalization or a market correction is beginning to take place. Many of the low-priced offers are not receiving low counteroffers because the sellers have reduced the prices to within the correct range of value. This may not be true of all homes, because there always will be sellers who will sell for a lower price if they are in distress.
Perspective buyers may search the Web, and find that sellers have negotiated a great deal off of the list price in the past -- up to a 25 percent to 35 percent reduction. But, as we look into the homes going under contract today, some contract prices are beginning to come closer to the list price.
The remaining "steals" are being absorbed. This is the correction.
Sellers have found that, if they needed to sell, they had to move down, because the market has forced them to do so because of the oversupply. It took awhile for sellers to realize how low the market had spiraled. Now, it is time for buyers to realize they might miss out on the house they like because it may not go any lower. With the interest rates low and the portability of homestead, we probably have reached the point of equalization.
After this point, the market then begins to stabilize -- that is, there is a "balance" in the real estate market.
I use two methods to determine if there is a change in the real estate market:
The first is the ratio of recent sold prices, compared with the list price of a property. The closer the sale price is to the list price, the closer we are to a balanced market.
The second method is the absorption rate. The absorption rate is determined by taking the active listings in an area, and comparing them with the number of sold properties within the past two to three months.
If there are 20 listings currently in your neighborhood, and five have sold in the past three months, then it will take an estimated 12 months to absorb the remaining listings, provided there are similar numbers of buyers in the next few months as there were in the past. If the activity level continues to increase, then the time or absorption rate decreases. My research in most neighborhoods in 2007 indicated an absorption rate of 12 months to two years in many areas.
In some areas, the absorption rate was projected to be as long as four years. Last week, my research for a particular neighborhood indicated a four-month absorption rate -- one positive sign of a changing market.
I believe this is a process that is just beginning to take place in the real estate community throughout Brevard County. Our market has been extremely volatile. Our prices were sky-high in 2005, dropped in 2006, and fell even lower in 2007.
Where are we going in 2008?
In my professional opinion, as a broker, we are at the point of the beginning of "equalization."
Every office has seen offers lower than one-half the list price of a home. A seller, who needed to sell, may have dropped his or her price to a midrange from the initial offer and sold.
Those sales all are a matter of public record, and one has access to this information through the Brevard County Property Appraiser's Web site. In the past, when a seller saw the recorded sale or heard of the low sale price, if one were smart, he or she did one of two things: Removed the home from the market or dropped the price to compete for the buyers in the market. At this time, the majority of listings are beginning to be priced competitively -- that is, sellers have begun to realize they must price their home with today's prices, not those of years' past.
A buyer can easily see competitive homes in the area, which may still be overpriced. It also should be apparent to a buyer which homes may be priced "right." At this point, the buyers in the market have heard of the low prices that sellers were accepting, but the buyers may not be in tune with a slight change in the market.
The process of equalization or a market correction is beginning to take place. Many of the low-priced offers are not receiving low counteroffers because the sellers have reduced the prices to within the correct range of value. This may not be true of all homes, because there always will be sellers who will sell for a lower price if they are in distress.
Perspective buyers may search the Web, and find that sellers have negotiated a great deal off of the list price in the past -- up to a 25 percent to 35 percent reduction. But, as we look into the homes going under contract today, some contract prices are beginning to come closer to the list price.
The remaining "steals" are being absorbed. This is the correction.
Sellers have found that, if they needed to sell, they had to move down, because the market has forced them to do so because of the oversupply. It took awhile for sellers to realize how low the market had spiraled. Now, it is time for buyers to realize they might miss out on the house they like because it may not go any lower. With the interest rates low and the portability of homestead, we probably have reached the point of equalization.
After this point, the market then begins to stabilize -- that is, there is a "balance" in the real estate market.
I use two methods to determine if there is a change in the real estate market:
The first is the ratio of recent sold prices, compared with the list price of a property. The closer the sale price is to the list price, the closer we are to a balanced market.
The second method is the absorption rate. The absorption rate is determined by taking the active listings in an area, and comparing them with the number of sold properties within the past two to three months.
If there are 20 listings currently in your neighborhood, and five have sold in the past three months, then it will take an estimated 12 months to absorb the remaining listings, provided there are similar numbers of buyers in the next few months as there were in the past. If the activity level continues to increase, then the time or absorption rate decreases. My research in most neighborhoods in 2007 indicated an absorption rate of 12 months to two years in many areas.
In some areas, the absorption rate was projected to be as long as four years. Last week, my research for a particular neighborhood indicated a four-month absorption rate -- one positive sign of a changing market.
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