By Ready to buy

August 30, 2007 5:15 PM | Link to this

I wanted to buy a house in 2004, but pulled out of the market when I saw the prices increasing month to month at tremendous rates.

Back then, my realtor told me that to get a house I would have had to outbid other buyers, and even offer more than the asking price. I told her she was crazy, and that I would never buy in such a “hostile” environment for buyers, so I decided to keep living in my 2 BR apartment.

That turned out to be a good decision. My apartment is now entirely paid off, and I have accumulated lots of cash, enough to put 30-50% down payment on a house in the price range I am comfortable with.

CW would probably love to hear my stories…I hate debt with a passion, and with the exception of homes, I don’t buy anything on credit :-)

So, now I’m starting to see interesting things coming up on the MLS. For example, there is a house I’m interested in that was bought by the current owner in 1998 for about $150k. It’s a CBS home, in a good neighborhood.

I don’t care about the crazy prices of 2004-06, nor about the current asking price. I’m planning to make my offer using a 5% annual appreciation as my guideline, so I’m going to offer about $230k. Hopefully this logic will insulate me from any future losses in average home prices.

What do you guys think? I would love to hear your input about my approach.

Thanks, Christine

By Joe 6-Pack

August 30, 2007 5:22 PM | Link to this

Hi Christine, All I want to know is if you have any pictures that I can see.

Thanks, Joe 6-Pack

By Max the Chauvinist

August 30, 2007 9:03 PM | Link to this

I think, Christine, you display the same inability with mathematical concepts that most women seem to.

The value of dollars has been dropping at a breath-taking pace. Your dollars are now worth about 70 per cent of what they were at the beginning of 2004.

That may be too conservative an estimate. For example, in just one recent year the Brazlian currency gained 36% against our dollar, and that while Real was subject to inflation in its own country.

The recent run-up in home prices corresponded to price hyper-inflation in everything of intrinsic value, from gold to gasoline.

The Fed is artificially trying to contain resulting asset hyperinflation with a sudden draconian rise in rates. This can only work temporarily.

Even this year, in markets such as Seattle, home prices are up about 20%.

Your only chance with your money then was to get it into appreciating assets of intrinsic value, such as houses.

That is still your only chance, for the forseeable future, with the woefully less valuable cash you have.

By Mike Fink

August 30, 2007 9:12 PM | Link to this

“Draconian rise in rates”.

Oh for the love of god, stop reading the NAR research on this subject.

The fed funds rate is 5.25%; historically that number is not even above average, let alone “draconian”!! Go back through history, the rate topped 10% several times before in history. 5-6% is an average funds rate, not a “draconian” one.

http://www.the-privateer.com/rates.html

And the Real and the dollar is an anomoly, why don’t you quote out the change in currency strengths from major indexes throughout that time period. Yes, the dollar has lost value, but nowhere near the 30% you are claming above.

The dollar is losing value, in fact, partly because of the crazy runup in home prices. Again, over 1/2 the population of this country owns a home and it represents their largest asset. When that asset doubles (or more, as in the case of S. FL) in value, the money supply skyrockets right along with it. There is no way to have tame inflation and 40% YOY home appreciation; just cannot happen, TOO MANY PEOPLE OWN THE ASSET CLASS.

By Michael Fink

August 30, 2007 9:19 PM | Link to this

Here is a visual representation of Fed funds rates back for ~60 years.

http://en.wikipedia.org/wiki/Image:FederalFundsRate_%28effective%29.png

As you can see, we are historically still able to borrow money very inexpensively. The problem is that the house prices got insane, not that the Fed funds rate got back in line with historical norms. Crying for a Fed rate cut now is silly, reduce the home prices, that’s the number that’s out of line with historic means (I wish I could overlay Shillers chart on that Fed fund chart; you tell me which one needs to adjust looking at them side by side).

http://en.wikipedia.org/wiki/Image:ShillerIE2Fig_2-1.png

By Go for it

August 30, 2007 10:34 PM | Link to this

Christine, I applaud you. Go ahead and make your offer on your home of choice. You have nothing to lose. What’s the worst that can happen? They say No. Who cares? Whatever you do decide to do, Don’t listen to Mike Fink. While his intentions are good, his quite delusional. He has lost touch with reality. You at least own your apartment. Mike Fink owns absolutely nothing. If he was so smart as he claims to be, Why is his end result zero? Because what he seeks can’t be found . Continue about your buisness and buy what’s right for you and within your price range. You have the advantage. Go out there and negotiate for what you want. You have nothing to lose.

By Jeremy

August 31, 2007 9:13 AM | Link to this

Christine — I think you have come up with a very reasonable way of determining value. I have looked at a similar methodology myself. I don’t think sellers are quite ready to accept realistic prices, but you might get lucky. For my money, we are still at the beginning of the problem. The vast majority of ARM mortgages reset in spring of ‘08. We will start seeing real fallout next fall. I don’t expect a collapse in housing prices. A house is still a valuable asset. But I think valuations still have quite a bit of adjusting.

Your method provides a lot of protection to the continued problems, but I think you are probably to early.

I will give one example. As with all examples, it is not reprsentative of the larger market. But here goes:

A house in Royal Palm, built in 1983, was listed at 389K about a month ago. It’s the nicest house in a very clear middle class neighborhood. 1700 sq ft under air, 4/2 (small bedrooms), nice pool, nice landscaping, updated inside. The house was bought in 1992 for 99K. It was bought again in ‘04 for 260K.

A 5% straightline would give a 2007 price of 216K from 1991. From the 1994 number it works out to 301K. By the way, to get to the 2004 number, you need annual appreciation of 8% since 1991. That’s fairly signficant. Either way, the difference between 5% based on 91 or 04 is a difference of about 40%.

The homeowner originally listed in July at a “what are you smoking?” 389K. She got nothing.

She then tried a 5-day, non-binding auction with the starting bid at 174K, but a reserve she didn’t mention. Highest bid was 250K. No sale.

She relisted 3 weeks ago at 369K, then 349K a week later, then 329K. Now she is asking for “any reasonable bid” but makes no indication of “reasonable.”

Basically she’s unrealistically above even the bubble levels. To get to 340K in 2007, you need 8% appreciation per year every year since 1991. Given the long-term (post WWII) HPA of 5%, that’s a massive number.

Unfortunately many sellers still believe they are going to get top dollar. By the way, my bid on this house topped out at 220K. I don’t care how nice it is, it’s still in an older middle class neighborhood. With new developments going up and houses priced in the 300s, there is no way I’d buy a house like this if I couldn’t reasonably rent it at a small profit. I figure it would rent for $1400 or $1500. With a mortgage of $1150 and taxes and insurance of a couple hundred per month apiece, the only benefit you can derive at that level comes from the tax breaks.

Bottom line? This seller is still smoking something tasty. I’m betting most other sellers aren’t ready for reality either.

Good luck!

By Realtor

August 31, 2007 11:38 AM | Link to this

My selling clients tell me what they want to clear. My buying clients tell me what they are looking for. I do the credit background on the buyers, research the comparable listings, and set up the viewings. I can work with the sellers on the selling price. I get cursed by my buyers when I tell them they can only afford a certain price range. I cannot come back to my sellers and show them an offer for half of their listing price. Gas is $3.00 a gallon. I do not have time to waste with people who cannot afford property here. Every agent in town makes sure what the buyers can afford before we cart them off for the day. We show them A, B, C, D, and E. At the end, we say to them, which one do you want to buy? If they say they did not like anything of what they saw or will wait later, that is fine. No more time wasted on them. We all move on and I work with other clients.

Christine is known as a J.A.F.U. Just Another F**kin Underachiever. A person seeking on a property deal that thousands of other underachievers are also eyeing on. What they do not understand is how to pull the trigger of making the deal. Making low ball offers, will not get the buyers into the door the second time around with the sellers. Rule of thumb is 92-96% of the listing price should be the offer.

By To Realtor

August 31, 2007 12:24 PM | Link to this

Uhm… excuse me, but I think Christine told us she has 30%-50% down payment on a house in the 250k price range. That means she has around $100,000 in cash laying around. Having $100,000 in cash is not underachieving, because the last survey I saw in Money Magazine showed that the average household in the United States has less than $3000 cash at any given time. That is sad, but true, so I would back off that earlier statement.

You’re just another bitter Realtor. Hurry up and show some places today, because you’re going to be late to your bartending job tonight.

By Rich R

August 31, 2007 1:06 PM | Link to this

Realtor is the perfect example as to why NOT use a Realtor.

They all suck!

I’ve NEVER offered over 75-80% of asking price. Sellers can easily say NO, but it only takes one to say YES.

It seems that Realtor caters to his/her needs first. This is typical.

By Rich R

August 31, 2007 1:06 PM | Link to this

Realtor is the perfect example as to why NOT use a Realtor.

They all suck!

I’ve NEVER offered over 75-80% of asking price. Sellers can easily say NO, but it only takes one to say YES.

It seems that Realtor caters to his/her needs first. This is typical.

By Curious

August 31, 2007 1:52 PM | Link to this

Christine,

As a Second, Third, etc. to what has been said above; avoid any real estate sales person who thinks like Realtor. You have learned something valuable here today as you interview potential professional salespeople, if you choose to use one.

Given the way you say you are going to calculate present value of a property, you shall be a much easier sale than me. As mentioned in another post, I only buy fixer-uppers and currently calculate my approximate bids as recent (last one or two months) actual sales prices of comps that have already been upgraded, minus the cost to bring them up to current standards, times .65. This assumes you can find some recent sales!

Secondly, my multiple tells you the way I see the market heading. As prices continue to drop for the next one to two years, that multiple will of course rise. I do not expect to have any bids accepted for a long time and it is going to take a lot of time and runaround hard work to find such motivated sellers. Fortunately I have the time to do this and enjoy making a few bucks this way but mainly, would really feel stupid if I rushed and bought something only to see its value continue to drop. What’s the saying? — “Act in haste, repent at leisure.”

By Greg Block

September 1, 2007 7:38 PM | Link to this

Realtor, shame on you for your ad hominem attack on Christine.

I don’t mind if you characterize “low-ballers” as under-achievers. A friend of mine was in the market for a home a few months ago, and I advised under-bidding by 10%. She found a home she liked and submitted an offer that was 10% below the list price. The sellers declined the offer. She asked me what she should do, and I advised she look for another house (actually, I advised she wait a few years, but she wouldn’t listen to me).

A few weeks later, the sellers’ agent contacted my friend and accepted her offer. It turns out the sellers were getting divorced and needed to sell the house right away.

You may call my friend an under-achiever, but she saved $30,000 on her home purchase.

I am going to wait for time to help me low-ball. I am renting, have the proceeds from the sale of my last home (sold in 2005) sitting in the bank, and can wait years to find a good deal. Can today’s sellers wait years? I think not. I know plenty of people who are sitting on three or more houses which they cannot sell, and cannot afford to rent. They are paying several thousands of dollars a month in carrying costs. Soon the house will go to the bank, and the bank won’t enjoy holding the REO. Then, in a few years, I can buy for fifty cents, or less on the dollar.

Personally, I don’t care if I alienate a realtor with a low-ball offer. These realtors were telling me in 2005, “buy now or be priced out forever” . There was a hous I was interested in purchasing in 2005; the list price was $560K. That same house recently sold for $409K in less than two years. I don’t think I was “priced out forever”, do you? Why would I want to ingratiate myself with someone who is so self-serving and has no financial acumen (only a high school diploma, no college)…

I see many real estate agents selling their personal stuff on eBay. They haven’t had deals in months. Why should I be taking financial advice from them?

Realtors are now discredited, from David Lereah, Lawrence Yun and everyone down to the plebes.

Over the next few years, homes will pass from the weak hands to the strong hands. Christine, you are definitely a “strong hand” because you have patience, wisdom, and MONEY on your side. Most of the poor suckers that were talked into a home they couldn’t afford by a greedy realtor will rue the day they bought the snake oil. Rock on!

Hey Mike F, from the HBB, good to see you’re spreading the good word here!

Ciao

Greg Block

By Max has a Question

September 3, 2007 10:00 AM | Link to this

Now Max gets to ask a question.

There are people I disagree with here, but I have to admit this about some of them: the ones with property, like Rich R., have money. Invariably the ones who are poor have no property (or nothing but some vacation cottage on some Southern lake somewhere).

How is it that those who have no property also have no money?

A better question is why those, like Fink — with no money and no property — are giving financial advice to others!!!

This is a bit like using Hannibel Lechter as your psychiatrist.

By Max Redux

September 3, 2007 10:09 AM | Link to this

One other thing strikes me about the “I never offer more thn 29% of asking price crowd:” most of them never make a dime on anything.

To paraphrase Buffet, Lynch, and virtually anyone who has shared their successful business techniques: I would rather buy a great asset at a fair price, than buy a fair asset at a great price.

Just one more reason why the chiselers have nothing.

By Greg Block

September 3, 2007 2:04 PM | Link to this

Taking financial advice from someone just because they are rich is the quickest way to lose what little money you have. Rich people do not have the same risk tolerance that I have; nor do they have the same investment window as I. One of my friends, who is very wealthy always gives me advice that takes on more gambles than I care to take. He can afford to gamble; I cannot.

In fact, I don’t even know if a person is rich because they inherited it, were lucky, or worked hard. Also, a lot of people confuse debt with wealth. I have a friend with a “million dollars” in real estate. Of course, that is all leveraged, and the price in their head is the dream price from 2005, not the 20% writedown they would suffer if they tried to sell their properties now.

A lot of the “rich” people I know, are quick to take me aside and try to unload some of the properties they are stuck in once they hear I have cash in the bank. It seems that they want to “stay rich” at my expense. When I hear someone give me financial advice, the first question I ask is, “how much are you going to profit from your advice?” Usually they will make out quite well, so I know they are not disinterested.

I did quite well in the real estate market, but am glad to be out of it. If you think, “Don’t be a sucker to a rich guy who’ trying to sell you something,” is bad advice then feel free to ignore it. I know it has personally saved me from financial ruin, so it’s the best advice I can offer.

By Lern to Reed

September 3, 2007 6:46 PM | Link to this

The gist of the advice above was not necessarily to take advice from rich people, but certainly to avoid taking financial advice from the utterly incapable financially, such as Curious or Fink the Squatter.

Yes, there are poseurs like Rich R, who are nothing more than predators, and I myself nearly started hawking real estate advice to losers who turned to the Trump brand for advice. I’ll save you 4500 dollars for 10 lessons: do short sales on foreclosures.

“Arguementum ad hominem” notwithstanding, you talk to a mortician or a taxidermist when you want to know about embalming; you go to the Fink Family Farm Fest when you just want to get bombed.