Shopping for a Home In a Buyer's Market

How to make the most of a 'window of opportunity' in 2007 to take advantage of lower mortgage interest rates and seller flexibility. Learn these five rules for house hunting amid declining prices.
By: Marshall Loeb: Wall Street Journal Online
It's no secret that the housing market finally, after a long while, belongs to the buyer. Home sales and prices sagged in 2006, and 2007 is not expected to be too different. According to David Lereah, chief economist for the National Association of Realtors, buyers have a "window of opportunity" in 2007 to take advantage of lower mortgage interest rates and seller flexibility.

Colby Sambrotto, COO of ForSaleByOwner.com, a no-commission real estate marketplace, offers these rules for shopping for a new home in a buyer's market:

• Don't limit yourself. While you should look for homes that are listed with real estate agents, don't discount properties that are for sale by owner. They make up about 25% of the market, and you may be able to find a good deal with one of them thanks to a lack of agent commission and fees.

• Hold onto a property for a while. Now is not the time to buy a condo or home to flip quickly for a profit. Make sure you buy a property at a good value - you're more likely to have a good sale in the future.

• Take your time. There's no need to rush in this market, so don't worry about putting in the highest bid or writing a check the minute you like a place. Research the neighborhood to find out if the asking price is consistent with other homes in the area.

• Ask for incentives. To sell their homes, owners may be willing to throw in extras such as appliances, work sheds, drapes or even patio furniture for the asking price. Try negotiating some extras.

• Shop around for a mortgage. To get the best deal available, ask for as many quotes as you can. If you get a pre-approved mortgage, you'll have even more leverage at the negotiation table.
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Proposed Bill Would Keep Banks Out of Real Estate

On its first day in session, the 110th Congress introduced the Community Choice in Real Estate Act, which would keep banks from controlling all aspects of real estate transactions.
REALTOR® Magazine Online
Pat Vredevoogd Combs, president of the NATIONAL ASSOCIATION OF REALTORS®, hailed the 110th Congress for quickly moving forward with key legislation that NAR believes will ensure that the real estate industry remains competitive.

H.R. 111, the Community Choice in Real Estate Act, was introduced Thursday in the House by its sponsors Congressmen Paul Kanjorski (D- Pa.) and Ken Calvert (R-Calif.). Fifty cosponsors were added on the first day of Congress.

NAR will work toward the bill’s passage with Reps. Kanjorski and Calvert, who helped garner bipartisan support for it.

NAR has repeatedly stressed to Congress its long-standing support for keeping banks as impartial providers of credit and not permitting them to control all aspects of real estate transactions. Putting real estate brokerage into the hands of banks would leave consumers with fewer choices and higher costs, NAR says.

"REALTORS® provide extensive personal attention to consumers during the lengthy process of buying a home," Combs says. "It would be difficult for banks to provide that type of counsel because of conflicts with their other business objectives.”

What the Bill Would Do

Enactment of H.R. 111 would keep real estate brokerage and management clearly defined as commercial activities and not financial matters, ensuring that the separation of banking and commerce continues as mandated by the Gramm-Leach-Bliley Act.

“Without passage of this legislation, we are concerned that national bank conglomerates will continue their attempts to enter into the real estate industry, putting both competition and the nation’s economic health at risk,” Combs says.

“The U.S. economy depends on a strong real estate market and a healthy banking industry," she adds. However, attempts by the Federal Reserve and Treasury to redefine real estate as a financial activity would have harmful effects resulting in less competition, higher costs for consumers, and give competitive advantages to the banks.”
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It pays to own rental real estate

Many enjoy great tax benefits, market-value appreciation
By: Robert J. Bruss: Inman News
On a recent flight from San Francisco to Chicago, I sat next to a talkative businesswoman. After we exchanged pleasantries and she learned I invest in and write about real estate, she asked, "What type of real estate should my husband and I invest in?"

Rather than give a direct answer, I replied, "Well, do you have any realty investments now?" Just our townhouse, she replied. "Has that been a good investment?" I asked.

She said they bought it about four years ago and since then it has more than doubled in market value. I responded that was extraordinary, but it can happen for well-located homes.

Then I asked her, "How much of a cash down payment did you make?" She replied, "Ten percent down. We got one of those PMI (private mortgage insurance) mortgages for 90 percent financing." Next, she launched into a rant about what a ripoff her $124 per month PMI premium is.

After I politely explained how she could cancel the PMI with an on-time payment record for at least 24 months by asking the lender to cancel the PMI based on a new appraisal, she was very grateful. "Why didn't the lender tell me?" she asked.

Then I tactfully redirected the conversation to make two points: (1) She and her husband wisely bought for 10 percent down, and (2) They are profiting from the benefits of leverage by controlling the entire property-value increase with just a small cash investment.

IF ONE HOME IS GOOD, WOULDN'T TWO BE BETTER? During the conversation, my seatmate said she and her husband want to buy a larger house. I congratulated her on that wise decision, especially in the current "buyer's market" in most cities.

Then she asked if they should keep or sell the townhouse when they buy a larger home. Since she mentioned the townhouse is located in a good neighborhood and there seems to be strong rental demand, I suggested keeping the townhouse as a rental.

When my new friend asked about losing the $500,000 principal-residence home-sale tax exemption for a married couple filing jointly (up to $250,000 for a single homeowner), I explained the townhouse can be rented as long as 36 months before losing this benefit of Internal Revenue Code 121.

"That's presuming you and your husband owned and occupied it at least 24 of the last 60 months before the home sale," I reminded my seatmate. If the townhouse continues to go up in value over the 36 months after you move out, I continued, then you get to enjoy even more tax-free market-value appreciation up to $500,000.

Then I asked, "If one home is good, wouldn't two be better?" She got the point real fast. Next, I briefly explained the tax advantages of keeping the townhouse as a rental property for a few years before deciding to keep or sell it.

I explained the benefits of the noncash depreciation tax deduction for rental property, but I don't think I did a very good job. Saving tax dollars didn't seem to interest her.

PROS AND CONS OF OWNING RENTAL HOUSES. Although there are many tax advantages of owning rental houses, especially tax-free income deductions up to $25,000 if you earn less than $100,000 annual adjusted gross income, there are a few possible disadvantages.

The primary negative to owning rental houses is called "tenants and toilets." By carefully selecting quality tenants who are likely to pay the rent on time (based on their credit report and FICO score), the management problem can be minimized. Good-quality house renters often stay many years.

Another possible negative is maintenance. Periodically, house components need repair or replacement. Rental-house owners should have access to quick cash for an emergency, such as a roof replacement. A home equity credit line is the best source because it costs nothing (except a $50 annual fee) until it is used by writing a check.

PROFESSIONAL PROPERTY MANAGEMENT ISN'T CHEAP. Although owner management of rental houses is recommended to save costs if the property is located within an hour's drive, sometimes landlords either don't want to or are unable to manage their rental houses.

When that happens, there are professional property management firms available. Before hiring such a firm, investors should obtain client references and check out the firm extremely carefully.

Most professional property management firms charge fees of 10 percent to 15 percent of the gross rental income for houses. They often charge additional fees for supervising repairs and for renting vacancies. The best firms provide monthly computer printouts to owners showing rent collections and expense payments, along with a monthly check to the owner.

ARE APARTMENTS GOOD INVESTMENTS? My airline seatmate had one more important question: "Wouldn't apartments be a better investment since my husband and I travel a lot?"

Then I explained large apartment buildings can be good investments because the landlord can usually hire an on-site resident manager to collect the rents and manage the property. But I quickly added, "Then your job is to manage the manager."

My personal experience has been apartment buildings ... (1) usually don't appreciate in market value as fast as single-family houses and (2) problems with apartment buildings are usually big problems, such as malfunction of a key component or the need for an expensive repair, such as a new roof.

Also, if the local apartment rental market is soft, with too many vacancies, that severely hurts the rental cash flow.

Apartment buildings and commercial properties are valued depending on their capitalization or "cap rate," which depends on the net operating income. However, single-family rental-house market values depend on recent sales prices of comparable nearby houses rather than rental income and expenses.

BONUS ADVANTAGE OF RENTAL HOUSES. An extra advantage of investing in rental houses or any other type of real estate investment or business property (but not your personal residence) is it can be exchanged - tax-deferred - for other investment or business real estate of equal or greater cost and equity.

Internal Revenue Code 1031 makes it possible to pyramid realty investments from a small rental property into investment property worth far more, without the erosion of capital gains tax. Full details on this and other tax benefits are available from your tax adviser.
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Fixers: Fools rush in

Those who want to buy neglected homes cheap and renovate should do the math first.
Check your math before buying on the cheap with dreams of renovation, experts advise.
By: Marnell Jameson: latimes.com
"Many people buy the house, then find the contractor. They should do the reverse."
— Andy Heller, author and real estate renovation guru.

MARRY in haste. Repent at your leisure. That old saw could apply just as well to buying a fixer.

Before you fall in love and rush to buy and renovate a rundown old house that has a certain charm, take some time to get to know it better. A little due diligence, experts say, can save a lot of heartbreak — and serious money.

Todd Hays is a serial fixer.

The 45-year-old publicist just sold his 12th renovation project and is working on his 13th.

"I do it because I love to do it," he says, standing in his newest acquisition, an 80-year-old home in Pasadena. "I would do it even if I didn't make money doing it, though I don't want to lose money." Mostly, he says, he has made a profit — sometimes more than others.

For him, the decision whether to buy a fixer or walk away from it comes down to his heart and math. "I need to know I'm going to love the house when it's done and that to do what I want will make financial sense."

Hays lives in all his projects while fixing them, and saves money by doing much of the work himself.

But certain flaws in a prospective home, even one that he loves, will kill the deal. For Hays, deal breakers include expensive but essential upgrades that won't show, such as foundation, extensive plumbing or electrical work.

He avoids expensive projects to undo previous upgrades. For instance, he decided against buying an old Craftsman whose owners had stuccoed over wood siding.

Hays also steers clear of homes in danger of sliding down hillsides, and would think twice about buying a home that has been in a fire or flood.

"But the real deal breaker comes down to a home being overpriced for the amount of work it needs," he says. To make sure the property pencils out, Hays makes a detailed list — down to specific types of doors and hardware — of what all the improvements he has in mind would cost. Then he adds 10%. "People who have never done this should add 20%. There are always surprises."

He then tracks every dollar he puts into the home renovation on his computer. "I know — to the penny — what I paid, what I invested and what I net."

Andy Heller, 44, co-author of "Buy Even Lower: The Regular People's Guide to Real Estate Riches," agrees that those new to renovation should proceed with caution. He recommends buyers get good appraisals and inspections up front and be prepared to walk away from certain flaws.

Fifteen years ago, when he and his partner, Scott Frank, started buying homes to renovate and sell, they walked away from houses with significant structural problems, foundation issues or excessive termite damage. "These homes aren't for amateurs."

Heller, who lives in Atlanta and gives seminars across the country on this subject, says, "Any offer you make should be contingent on inspection and walk-through."

When Heller and Frank walk through a home for sale, they calculate what repairs it will need and make an offer based on what they see. While in escrow, they get a professional inspection. If, after going through the home carefully, they find more that needs repair, they go back to the seller and ask for a discount based on the additional work.

"We always leave ourselves an opportunity to reopen the negotiation," Heller says. For them, a decision to buy comes down to one word: margin. "We don't care if the electrical is shot, so long as we've assessed it, built that into our offer and gotten an appropriate discount."

To determine the size of a discount, Heller suggests that a buyer have a contractor estimate how much the repair or upgrade would cost, then present that to the seller as the basis for asking to purchase at a lower price.

Heller and Frank rely on experts providing good estimates before finalizing their purchases. "Many people buy the house, then find the contractor," Heller says. "They should do the reverse."

Before closing, the pair recommend buyers walk through the house with a reliable contractor and obtain a detailed estimate of what it would cost to make it what they want.

People often get in over their heads for three reasons, Heller says: They don't properly assess the necessary repairs before they buy. They don't have a good inspector and good contractors. Or they don't have the money to do the needed repairs.

Still, even if a buyer does everything right, the market is the wild card. For this reason, Heller says, homeowners need an exit strategy. Options for owners who can't cash out when they want to include remaining in the home longer, renting the house or selling it on a lease-option.

The Southern California real estate market has primarily allowed Hays to ride the wave of appreciation and realize a nice profit. But back in the early '90s, while he waited for the market to come back, he lived for seven years in a house that he'd intended to live in for only two. As it was, he made only about $5,000 on the house.

He did a little better the last time around. A home he bought in January 2003 in Studio City for $600,000 recently sold. He invested about $80,000 in the home and will net more than a $300,000 profit for the upgrades after factoring in appreciation.

If he'd used a contractor instead of doing much of the work himself, he estimates he would have paid an additional $40,000 for improvements, but he would have still come out ahead.

He bought his current home project, a 2,300-square-foot house built in 1926, in September for $700,000 — $159,000 below the initial asking price. He's working to restore the Pasadena home's original Spanish style, which previous owners weren't always faithful to. For starters, he removed the hollow-core doors and put in shaker doors he found at Lowe's that resembled those that were in the original house.

Today, after renovating more than 100 houses in a decade and a half, Heller and Frank like what turns other buyers off. "We love the ugly and awful. We have bought homes on busy streets, under power lines, on steep, sliding slopes and near railroad tracks," Heller says. "We won't walk away from any house if the price is right."

Even though money is important, it's not always the most important factor. Frank overpaid for the home he now lives in and knew he was overpaying when he bought nine years ago. But it's the house his wife wanted.

"Did I overpay?" he asks. "Yes. Did it make my life better? Yes. There is a value to having a happy wife."

*
Marnell Jameson is a nationally syndicated home design columnist. You can reach her at http://www.marnijameson.com .
*
(INFOBOX BELOW)

Look long and hard

Bruce Irving, former producer of "This Old House," worked on 33 renovations during his 17 years with the show. The renovation consultant offers this advice when buying a fixer:

Appraise the neighborhood. Obtain the price range of recently sold houses. You want to know how much you could safely invest and not price yourself out of the neighborhood.

Visit the building department. Find out what is allowed — and what's not. Investigate every regulatory body that may have a say in the remodel.

Get an inspection. Inspectors don't want to be deal breakers, but most will tell you what's wrong if you listen. If there is a little water damage, suspect a lot. Owners may "go to great lengths to try to hide it," Irving says.

Beware of environmental hazards. Lead, asbestos and mold are all common in older homes. Either avoid these problems entirely, or factor in what it will cost to abate them.

Make two lists: What needs to be done. What you want done. Must-haves in a house include hot and cold running water, heat, no leaks. On the wish list may be a new kitchen, updated baths, a few walls moved. Seek realistic, detailed bids.

Don't over-improve. Before you put in a tricked-out kitchen, look around the neighborhood and see what's comparable. If a gourmet kitchen is important to you, put it in. Just know that if it's a lot nicer than any kitchen around, you risk not getting a full return on that investment.

Couples should test their remodeling compatibility. If you're going to do this with your mate, first tackle something small, such as installing a mailbox or a closet system, before taking on something major.

Time it right. Don't start a renovation if you already have your plate full with other responsibilities demanding your time and attention. Remodeling is stressful.

Don't underestimate what it takes. The biggest mistake most people make is grossly underestimating the time, energy and money they will need to invest.
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Meltdown Was More of a Mixed Bag

Even though 2006 was a flat year for the L.A. County housing market overall, data released last week shows that some areas did well while others took hard hits.
By: DANIEL MILLER & DAVID NUSBAUM: Los Angeles Business Journal Online
Despite flat market, some cities saw home sales skyrocket in 2006.

Even though 2006 was a flat-to-down year overall for the housing market in Los Angeles County, a review of full-year data released last week shows that many affordable areas enjoyed a banner year.

But many of the expensive areas got rocked.

There was no housing downturn in Inglewood, for example. The four ZIP codes that make up the city had a combined median house price of $585,000 in December, making it a reasonably affordable area for Los Angeles’ pricey market. In 2006, the number of homes sold in those Inglewood ZIP codes increased a whopping 55 percent. The price of homes increased more than 15 percent.

The same is true in Carson, where sales increased 28 percent and prices increased 9.2 percent.

All those numbers were better than the county as a whole. For 2006, the number of homes sold declined 6.6 percent to 496,512 units. The median price from December to December increased 4.8 percent to $550,000.

But at the same time that many affordable areas were enjoying a good, even great, 2006, several high-end areas hit a very rough patch.

Malibu saw its sales volume plunge 45 percent and prices drop 15 percent. Beverly Hills’ three ZIP codes had a composite sales volume drop of 35 percent and a price drop of 38 percent.

“It’s really a price-driven market and every particular marketplace has its own distinction,” said Betty Graham, president and chief operating officer of Coldwell Banker Residential Brokerage of Greater Los Angeles and Orange County.

The data for the review was provided to the Business Journal by HomeData Corp., a Melville, N.Y. company that tracks housing prices nationwide. (Data for December, including a breakdown by ZIP codes, begins on Page 28.)

Raphael Bostic, economist with the USC Lusk Center for Real Estate, said that in the last 18 months, discretionary sales – largely those done to take advantage of the boom of 2002-2005 and not done out of necessity – “have been taken off of the market.”

As a result, the high-end portion of the market has taken a hit.

“A lot of the housing frenzy just moved people to accelerate their purchases,” Bostic said. “So now that pool of people is smaller than it was before.”

At the same time, affordable homes tended to see prices accelerate as demand for them stayed brisk.

“There is going to be more competition because they are more affordably priced,” said Robert Kleinhenz, deputy chief economist for the California Association of Realtors. “This translates into price appreciation.”
Looking at the data a different way, the Business Journal compared the 30 ZIP codes with the biggest increase in the number of homes sales in 2006 to the 30 that had the sharpest drops.

Comparison Results

The 30 ZIP codes that had the biggest increase were populated mainly with affordable homes. As a group, those 30 ZIP codes had a median price of $500,000 in December, well below the county median of $550,000. That $500,000 price also was up smartly – 11 percent – from the year earlier. These 30 ZIP codes saw a combined 68,124 units sold during 2006 – up 20 percent from the previous year.

At the other end of the spectrum, the 30 ZIP codes that had the biggest decrease in sales activity tended to be in areas with expensive homes. They had a median price of $770,000, above the county median and up only about 3 percent from a year earlier. These areas had a combined 24,276 units sold, down 38 percent from 2005.

Again, the affordable homes performed the best.

Although some areas did well while others did poorly, there was a large, third group: Neighborhoods that more or less stayed fairly close to the country averages.

One statistical oddity: Since April the median price in Los Angeles County stayed constant at or near the $550,000 level, even though there were fewer sales at the upper-end and more sales at the lower end. The reason is that home prices overall increased. That offset the drop in sales at the high end.


The coming year

Could 2007 be more of the same?

Industry professionals say that the market appears to have weathered the brunt of the storm.

“We are looking at a housing market that took its hits mostly last year,” said Kleinhenz.

Several industry experts believe the county market will not experience the sort of house-price collapse the region went through in the early 1990s. Currently, unemployment is historically low, unlike the early 1990s when the region was rocked by the collapse of the local aerospace industry after the Cold War and experienced a serious recession.
By way of comparison, the unsold county inventory in February 1991 stood at 27.9 months; in December 2006 it was at 8.3 months, meaning it would take 8.3 months to sell all the homes on the market at the current pace of sales.

“We might see a little bit more price erosion and decline in sales, but because underlying fundamentals are good I don’t think we are going to have a housing market in a free fall like the early 1990s,” Kleinhenz said.

Syd Leibovitch, president of Los Angeles-based Rodeo Realty, a high-end brokerage, said that because so few people moved last year “there has to be some pent-up demand.”

“I think sales volume is going to be higher than last year,” he said.

According to Bostic, expect more of the same from the “bread and butter, middle of the road properties” and minimal price declines across the board.

Graham said that the American public is resilient when it comes to the real estate game, and is accustomed to watching the market fluctuate.

“The American public mostly understands that (real estate) is a long term investment,” Graham said. “I believe we have pent-up demand right now. I believe they are happy and comforted that the housing market didn’t derail.”

Graham said that her agents are sensing the public’s optimism.

“The bottom did not fall out,” she said. “That is a confidence-building fact.”
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'Tis the season to beware of tax fraud

Who's filing your taxes this year?
By: Ilyce R. Glink: Inman News
Q: I have a friend who files the tax returns for some of my friends and me every year. My friends did not get their tax refunds last year. As it turns out, our accountant friend seems to have given his own address and account number for all of my friends' tax returns to be direct-deposited. Is this identity theft? What is the federal punishment for such an offense?

A: Sounds like your "friend" is no friend. The person who filed your tax returns and stole your money is likely guilty of fraud, which is a much more serious offense (not to suggest that identity theft isn't taken serious). The punishment could include making restitution, paying a fine, and jail time.

Please talk to your attorney or call the IRS. Your friends might also want to check their credit histories and scores to be sure something else unpleasant didn't happen. You can pull a free copy of your credit history each year from each of the three credit-reporting bureaus by going to www.annualcreditreport.com.

And this year, either learn how to file your own taxes (if you make less than $50,000 you can file for free with the IRS and have the funds direct deposited to your own account), or pay a licensed accountant to file them on your behalf.

Q: My two-year adjustable-rate mortgage (ARM) expires in January. My current interest rate is 6.9 percent. Based on today's rates, how much will my payment increase?

A: What kind of loan do you have? Do you have an interest-only loan? Do you have a pay-option ARM? Does your loan convert to a 1-year ARM or will you get another two years before it adjusts for another two-year period, or does your loan convert to a 28-year fixed-rate mortgage? What index is your loan tied to?

Let's assume you have a straightforward ARM where you pay principal and interest. If your ARM has a 1 percent or 2 percent interest-rate cap, then it might rise to 7.9 percent or 8.9 percent. But some interest rates have actually dropped a bit, so it's possible that your loan's interest rate wouldn't go up at all and might in fact drop some.

You might want to call your lender and ask. Then, I'd start shopping around. At press time, Bankrate.com was featuring 5-year ARMs for 5.54 percent, 15-year loans for 5.46 percent, and 30-year loans for 5.69 percent. The best rates require a top credit history and score. Some of these rates include the payment of discount points (one point equals 1 percent of the loan amount), so make sure you call around to get the best rate and the best deal for yourself.

Q: I recently purchased some land with a partner. The land is in my name because I'm financing the deal, but he is a partner because he did all the legwork. We intend to build houses on the land after getting some changes from the local zoning committee.

Here's the problem: While my partner is my friend, his character is somewhat questionable when it comes to money. He has suggested that I quitclaim the property to him so that he can talk to builders more easily without having to get approval from me. If I do this, would I lose all rights to the land? Can I quitclaim the property for a period of time, like two months, and then regain the ownership rights down the line?

It's not likely he'll mess things up, but when it comes to money, people do strange things. By the way, I do travel quite a bit, which is why it isn't that convenient for me to schedule meetings with builders.

A: This deal has trouble written all over this. How can I put it simply: Do not quitclaim the property to your partner. He doesn't need to own the land to talk to builders. You and he are partners no matter who owns the land, right?

And, if you don't trust his judgment with money, I can't see why you'd hand over a huge asset to him.

But clearly this "partnership" hasn't been fully realized. You and he haven't talked through what each person's responsibilities are, and how the deal should be handled. Have you talked about how the profits will be split? Will you be reimbursed for the cash you spend first and then what's left will be shared?

Your friend sounds nervous, and rightly so. You should talk to a real estate attorney who can help you draft up a partnership arrangement with your friend that spells out who owns what, who is entitled to what, and what responsibilities each of you has.

By the way, it's OK to be an investor, but if you're too busy to meet with builders, you're placing a lot of trust in a guy who you say has questionable judgment when it comes to money. No matter where you are in the world, you'd better be ready to spend a lot of time working on the deal and making sure that there are no side deals involved that will siphon off cash.
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NAR’s Pending Home Sales Index Suggests the Housing Market is Stabilizing

Pending sales of existing U.S. homes fell 0.5% in November but held above the low hit in July, suggesting the housing market is stabilizing, a real estate agents' trade association said on Thursday.
RISMedia
The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in November, fell to 107.0 from 107.5 in October.

Analysts had been expecting a modest rise in the index. The median forecast of a Reuter's poll of economists was for a November index level of 108.0.

The November level was 11.4% below the year-earlier level, a shorter drop than the 13.2% year-on-year decline posted in October.

The trade association read the smaller decrease from year-ago levels as a sign that the troubled U.S. housing market was stabilizing.

"The index is pointing toward fairly stable home sales in the near future," David Lereah, chief economist for the trade association said in a statement. "That is another indicator that home sales likely bottomed-out in September."

Home sales climbed the two months after September.

The index covers pending sales of existing single-family units, condominiums and co-ops. A home sale is pending when a contract has been signed but the transaction has not closed.

Pending sales typically close within one or two months of contract signing.
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The Weekend Guide! 2007 New Year’s Resolutions a-go-go.

The Weekend Guide 2007 New Year’s Resolutions a-go-go.
Full Article:
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Buying a rent-controlled building?

The tenants come with it.
By: Kevin Postema: latimes.com
Question: I am considering buying a rent-controlled apartment building in L.A. The seller of the property wants to make the sale contingent on keeping the existing tenants in the building, probably to avoid having to pay them any relocation fees.

Does the buyer or seller pay those fees in this kind of a transaction? Also, if I buy the building, can I eventually give the tenants 30-day notices and get new tenants in at market rents?

Answer: As of Jan. 1, the state law is changing to require owners to give renters at least 60 days' notice to move if the tenants have occupied their units for more than one year.

For tenancies of less than one year, 30-day notices will still suffice.

However, neither the seller nor the buyer can give the tenant of a rent-controlled apartment a 60-day notice to move due to a sale.

The only time you can give tenants of rent-controlled apartments such notices to move are in no-fault evictions, where the tenant does nothing wrong. No-fault evictions can be due to an owner or a manager moving in, demolition of the property, if it is being converted into condos, an abandonment of the rental business in the building or an order from a governmental agency condemning the building.

Selling the building is not on the list, thus the seller cannot give any tenants a 60-day notice to move.

As the new owner, you can give a 60-day notice to tenants in one unit to move yourself, your parents or your children into the unit.

You can also move a property manager into the building.

If you choose to move someone in, you must pay the displaced tenants relocation fees, which under the Los Angeles rent-control law are $8,200 for senior citizens, the disabled or renters with children who are under age 18, and $3,300 for others.

Also, you can raise the rents of tenants who follow those you evict for these purposes only by the amount of the annual rent increases since the evictions. You cannot raise them to market value in these situations.

Sue, but it could go in owner's favor

Question: You advised a tenant who did not get his security deposit refunded to sue the owner in Small Claims Court.

Here's what happened when I tried going to Small Claims Court: Despite strong evidence that I was in the right, including a witness who testified about how clean the apartment was, the judge ruled against me and allowed the owner to keep the entire deposit.

Apparently, judges can ignore the law and decide these cases however they want.

Please advise your readers that if they go to Small Claims Court, they may lose and be out not only their security deposits, but also time off from work to attend the hearing.

Answer: Consider them advised. You can lose a case any time you go to court, no matter how much evidence you have or how right you may be.

Small Claims Court judges tend to have a little more sympathy for tenants, but that doesn't mean tenants always win. Also, Small Claims Court judges have far more latitude in interpreting the law than those in other courts.

Interest due on renters' deposits

Question: I read that apartment owners are required to pay interest on security deposits annually to tenants under the Los Angeles rent-control law, and that the rates of interest change every year. How much are those rates for 2006 and 2007?

Answer: The rate for 2006 is 1.74%. For 2007, it rises to 2.39%.

If you don't want to write your tenants checks for the interest payments, you may give them one-time rent decreases as payment.
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Realistically Priced Homes are Selling, Realtors Say

Sales are evening out in the real estate market and are expected to hold steady through 2007, said Emerald Coast Association of Realtors CEO Barry Stafford.
RISMedia
The market's biggest hurdles are property taxes and homeowner's insurance, he said.

Stafford led a group of 2007's ECAR leaders in a discussion with local media.

Present were ECAR President Harry Millsaps, President-elect Cliff Chaplin, Secretary/Treasurer Glenda Glover, Assistant Treasurer Jan Huyser, Fort Walton Beach Director Bob Hudgens and Panama City Beach Director Kathy Hasbrouck, along with Kelly Cameron and Judy Catrett-Sheridan who are members of ECAR's public relations committee.

"2007 is going to be a fabulous year for Realtors," Millsaps said. "We had a nice October and sales were up in November over last year. Things are really taking off for 2007."
ECAR is working with the state to find a solution to the increases in homeowner's insurance.

Hudgens said he'd heard of cases where Realtors had lost sales because the would-be buyer couldn't afford homeowner's insurance or the property taxes.

"It seems to hit first-time homeowners most," he said.

Stafford said the area has been fortunate in the past to have had insurance rates as low as they were.

Growth in the area's market has sustained an 8-12% increase in residential sales revenue from 2000 to 2007.

"We had to work to make sales overall," Hudgens said. "This past year has been more of a reality check. People are beginning to see where they need to price their homes.

"The market is what sets a home's value, not Realtors," he said. "It's simply what people are willing to pay. Realistic sellers are selling their properties."

Chaplin said sellers were spoiled when the market peaked in 2004 and 2005.

"Sellers have had to adjust their expectations," he said. "Realtors used to have a home sold before they could even get a sign on the lawn."

Real estate has always been more of a steady, long-term investment, he said.

Glover said it's the Realtors' duty to help sellers realize we're in a stable market.

"2004 and 2005 were the aberration years," Stafford said. "We had the most sales in history for this area in those years.

"Now, sales are right where they would have been had 2004 and 2005 never been so great," he said.
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Commercial Real Estate Looks Good for 2007

Increases in rents and low vacancy rates point to another good year for commercial real estate in 2007, following a record year in 2006.
By: Ryan Chittum and Alex Frangos: REALTOR® Magazine Online
The bull market in commercial real estate made 2006 a record year, and many believe 2007 will be just as good.

"There's just a lot of cash in the system chasing assets that throw off a yield," says Michael H. Winer, who manages the Third Avenue Real Estate Value Fund. "As long as the liquidity is there, the prices will hold up."

Prices for a square foot of office space were up 17.2 percent in 2006 to $218, from $186 in 2005, according to Real Capital Analytics, a New York research firm. Warehouse and industrial space jumped 8 percent to $68 a square foot in 2006 from $63 in 2005. Retail space, such as malls and strip centers, was up 10 percent.

The increases in rents — up 2 percent in the third quarter alone — and the low vacancy rate, 13.5 percent, further supports the idea that 2007 will be rosy.
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Boom Over, Investors Focus On Fundamentals, New Areas

Individual investors are shifting their focus to multiunit rental properties and long-term holdings. Read about the new rules for buying and selling real-estate as the market cools.
By: Ruth Simon: The Wall Street Journal Online
Battle-scarred mom-and-pop investors are still dabbling in real estate. But they are changing the rules of engagement.

During the housing boom, many individual investors went deep into debt to buy investment properties - rental homes and condos - in hopes of selling quickly. The goal: Cash in on soaring prices. They may have had little or no intention of being landlords for the long haul.

Despite the end of the speculative craze, a number of markets in the fragmented real-estate world continue to lure investors willing to adjust their expectations. One key move: As rents take off, buyers increasingly focus on multiunit rental properties instead of the single-family condos and homes that were popular during the housing boom.

Some investors are also shifting money into regions of the country where they expect prices to continue to rise, such as Texas, the Kansas City area and parts of North Carolina.

Developers are also crafting special promotions, such as guaranteed rental income for as long as five years. Deals like these are particularly common in Florida, but they are also appearing in other markets, including Philadelphia and Myrtle Beach, S.C.

Another major shift: Most investors are focusing on the fundamentals that guided the market before the housing boom, especially cash flow - the ability to actually make money from, say, rentals, rather than from quickly selling the property. They are sticking with properties that turn a profit (or at least break even) after factoring in interest payments, taxes and other expenses.

That is a change from the past few years, when speculators were willing to lose money each month in hopes of selling for a big gain.

"Making a minimum of $50 to $125 monthly on each house is what we're shooting for," says Wendy Kallberg, a recent investor in Newport News, Va., who has purchased four single-family homes and condos over the past year at prices ranging from $67,000 to $140,000.

"I'm not interested in flips," Ms. Kallberg adds. "In six or seven years, I will go and sell the property."

Big risks remain for investors in residential property. The National Association of Realtors reported that the median price of an existing home in October was down 3.5% from a year earlier, the largest decline since the group began collecting these data in the late 1960s. And a glut of unsold homes could continue to keep prices in check.

Many investors have fled. The number of borrowers taking out mortgages to buy investment properties was off more than 70% in the third quarter from a year earlier, says First American LoanPerformance, a unit of First American Corp. Meanwhile, investors' share of home purchases fell to 8.4% in the first nine months of this year from 9.5% a year earlier, says LoanPerformance. Five years ago, that share was less than 6%. (Figures don't include investors who paid cash or financed their purchases by tapping the equity in their existing home.)

Some of the biggest declines in investor purchases are in once-hot markets where speculators helped drive prices to unsustainable levels. In places such as southern Florida, Phoenix, Las Vegas, San Diego and Washington, D.C., "the numbers just don't make sense for long-term investors...unless they are able to buy at a strong discount," says Jack McCabe, a real-estate consultant in Deerfield Beach, Fla.

Still, demand for investment properties remains healthy in some parts of the country. In the Charlotte, N.C., area, investors have been snapping up raw land and developing it for builders who are moving into the area as other housing markets cool, says Wallace Perry, president of Coldwell Banker United, Carolinas region. Land prices are rising at 10% to 15% annually, nearly twice as fast as home prices.

In the Kansas City area, out-of-state buyers are fueling demand for small and midsize apartment buildings, says William Hargis, a broker in Overland Park, Kan., with Reece & Nichols, a unit of Berkshire Hathaway Inc. Investor demand has also been strong in many parts of Texas. "We're seeing a lot of people from other parts of the country" coming to town to buy investment properties, says Steve Hendry of Re/Max Associates of Dallas.

With home prices softening in many markets, some advisers are counseling clients to focus on multifamily and commercial properties. Homes and condos are "not the place for a person who wants to make good, solid real-estate investments," says Jim Lumley, a broker in Amherst, Mass., who has written about real-estate investing.

Small apartment buildings and commercial properties are "more stable" investments, he says. "You've got a number of people paying rent."

Anthony Reed, an agent with Long Realty Co. in Tucson, is seeing increased interest in commercial properties because asking prices for many residential properties "are unrealistic." Investors "expect the property to at least pay the mortgage with a 20% or 25% down payment," he says.

Yields on commercial properties have fallen over the past four years, but rent growth is strong as vacancy levels decline, says Youguo Liang, a managing director for Prudential Real Estate Investors, a unit of Prudential Financial Inc. "If you balance the two factors, it's not the best time and it's not the worst time," he says, adding that conditions "slightly favor investors."

The situation is bleaker for those buying homes and condos as an investment, says Mr. Liang. "They should have very limited expectations on appreciation going forward - probably 0% to 3% annually for the next five years," he says.

Many speculators who bought property during the boom may now be facing a tough choice. They can either lose a moderate amount of money each month while they wait for the market to rebound, or they can sell and take the pain all at once. Refinancing the mortgage could help under certain circumstances, such as when a borrower has an adjustable-rate mortgage that has reset to a higher interest rate. But for those who took out exotic mortgages with low monthly payments, refinancing may bring no relief.

Some investors keep their eyes out for special situations, such as properties being unloaded by people who took on too much debt or invested unwisely during the housing boom. Willam H. Lublin, chief executive of Century 21 Advantage Gold in Philadelphia, says he is now taking a look at two groups of properties currently owned by investors in financial distress.

As the market for homes and condos has cooled, some developers are unveiling special promotions designed to appeal to investors worried about cash flow. In Philadelphia, Maxwell Realty Co. is telling qualified investors who purchase units in two condo projects that the developer will pick up the difference if their rental income doesn't cover monthly operating costs during a two-year period.

Under the program, the developer finds a tenant for the property and is responsible for monthly mortgage payments, condo fees and real-estate taxes, provided the buyer puts 10% down.

In Hollywood, Fla., Kim Kirschner of Kirschner Realty International is working with several developers who have created similar incentive programs, designed to give investors "break-even or some type of [positive] cash flow for a two-to-three-year period."

Jeff McConkey, broker-owner of the Avista Group of Keller Williams Realty in Tampa, says he's working with several condominium developers who are offering a "rental-assurance" program that stretches for as long as five years.

But investors should approach such offers cautiously, advises Mr. McCabe, the Florida real-estate consultant. "We're seeing a lot of developers and builders right now...breaking their promises to buyers," he says.
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Shelter in a Storm: Housing Market Expected to Stabilize in 2007

For many residential real-estate markets in the U.S., this year started with an advantage to sellers and ended with buyers holding the upper hand.
RISMedia
But, unlike some people had expected, the switch didn't follow the deafening "pop" of a massive real estate bubble.

That spells good news for both buyers and sellers in 2007, as markets return to balance, prices moderate and, if interest rates remain subdued, sales begin to edge higher.
Many markets saw slower home-price increases and a build-up of inventory in 2006, much to the dismay of optimistic sellers. And while speculators — investors who many argue are partially responsible for the massive housing boom — tried to exit the market, buyers began waiting out the correction to get the best prices, causing a drop in home sales.

In many areas, however, the correction wasn't as harsh as some had feared. In fact, the year as a whole might even have been described as "healthy" if the country's perspective hadn't been skewed by the boom of the past few years, said John McIlwain, senior fellow for housing at the Urban Land Institute. The market is still "well within long-term norms," he said.
"I think the story of the year is the bubble that wasn't," McIlwain said. "Instead of a bubble busting, so far it has been a healthy correction."

One of the bright spots of this correction: stabilized interest rates. Rates reversed course and trended down beginning in the summer. Last winter, some interpreted increasing rates as a signal that the real-estate party was coming to an end; now, with the 30-year fixed-rate mortgage averaging just above 6% and a lot of inventory on the market, it's not a bad time to buy, McIlwain opined.

And it does appear that this period of correction may be soon drawing to a close, said Lawrence Yun, senior economist for the National Association of Realtors.

"The past three, possibly four months have been seeing more stabilizing patterns," Yun said.

Inventory appears to be topping off, monthly declines in home sales seems to leveling and mortgage purchase applications appear flat, he said. All are indicators, Yun said, "that perhaps the bottom has already passed or (the market) is trying to reach the bottom over the very short term."

In San Diego, one of the hottest markets during the boom, realty executive Vicky L. Campbell said she's seeing evidence of the stabilization in her local market. October and November turned out to be good months for sales, said the sales manager at Century 21 1st Choice Pacific. She's even more optimistic for the near future as prices become more realistic-as long as interest rates hold steady.

"We're going to have a really good year next year," she said.

But many markets aren't completely out of the woods yet. Campbell said that only those who need to sell their homes are doing so; Honore Frumentino, a Realtor with Koenig & Strey GMAC Real Estate in Deerfield, Illinois, agrees, adding that less-committed sellers are holding off if they can.

In Ned Redpath's corner of the Northeast, buyers aren't even looking at properties that are priced high, said the owner of Coldwell Banker Redpath & Co. Realtors, with three offices in New Hampshire and Vermont.

"Right now we're in the middle of a significant buyer's market," he said. "I feel right now we're at the bottom of this huge trough we've been in."

In this housing correction, economic fundamentals-a poor job market, for example-often isn't to blame. In fact, areas with strong job markets- including Florida, Washington, D.C., Nevada, Arizona and California-are experiencing the largest price adjustments.

"People have jobs, but are not buying homes because of the affordability factor," Yun said. That, or "they think that home prices will come down," and will postpone their purchase.

According to Campbell, "Buyers got tired of paying high prices." And sellers got greedy, prompting stubborn ones who wouldn't budge on price to watch their homes languish without offers.

Nationally, NAR forecasts the number existing-home sales this year will be about 8.6% lower than the 2005 level; next year, existing-home sales will be 1% lower than this year's level. New-home sales should be 17.7% lower than last year; the group anticipates that the number of new-home sales will slide an additional 9.4% in 2007.

Even in the midst of a downturn, 2006 will be the third-best year on record for home sales. But the high inventory has had an effect on the industry, especially home builders.
The Commerce Department reported that housing starts reached a six-year low in October. November's statistics, however, showed a 6.7% rise in starts. David Seiders, chief economist for the National Association of Home Builders, said he expects housing starts to bottom out in the first quarter of 2007.

Prices under pressure

Concerning prices, consider the Federal Housing Finance Board's telling report released last month: In October, the average single-family home purchase price was $306,258. That's down from October 2005's $306,759 average price — and the first time since 1992-1993 that the October-to-October average actually decreased instead of increased.

As the market started cooling, price cuts — as well as additional incentives — have helped inspire the sales that did take place and began the process of reducing inventory, Seiders said.

All that said, each local market is unique.

Some areas, including Seattle, currently have both a strong job market and home-price appreciation, according to Bill Riss, chief executive officer of Coldwell Banker Bain, based in the Seattle area. Other towns, including areas of the Midwest that never saw extraordinary gains to begin with, aren't experiencing much of a drop-off now.

In Chicago, Frumentino said that sellers need to be committed in order to sell in today's climate. Average homes are taking about three times longer to sell; luxury homes take longer. Homes between 15 and 30 years old are having the toughest time selling, she said.
"If you don't have a motivated seller or someone who has to sell … it may not be a good time to sell," she said. "It's turned into a buyer's market, the buyers know it and they're flexing their muscles."

Looking ahead
As long as interest rates stay modest, many markets should continue to soften a bit into next year and then improve modestly, McIlwain said. "I think sometime in the middle of the year, we're going to see prices stabilizing," he said.

More than one economist is predicting that mortgage rates won't sharply spike upward in the near future. NAR projects the 30-year fixed-rate mortgage to average 6.3% in the fourth quarter, rising to 6.5% by next spring, Yun said. The Mortgage Bankers Association also is projecting a modest rise through 2008.

"I think interest rates are going to remain close to where they are now, which is historically low," said Chris Cagan, director of research and analytics at First American Real Estate Solutions in Santa Ana, California. For perspective, remember that people thought an 8% rate was a deal in 2000, he said.

Nationally, home prices should increase slightly next year, according to NAR. The group figures that the national median existing-home price should increase about 1.4% for all of 2006 to $222,600 and increase another 1% next year to $224,700. The median new-home price is expected to drop 0.5% to $239,700 for 2006, and increase 0.8% to $241,700 in 2007.

Despite slower price gains, affordability could easily remain an issue, McIlwain said.
"Families that are already in the market have been able to roll appreciation over into other houses," he said. But for younger families and others who don't yet own homes, "it's becoming increasingly hard" to buy.

During the boom, some home buyers used exotic loans in order to keep monthly payments down and buy larger homes than they could otherwise afford — a trend that concerned some within the industry.

One future response to the affordability factor that McIlwain anticipates is the building of smaller houses. Young, new home buyers most likely won't take issue with a downsized domain, either, he said.

"They're interested in location, quality of design and materials, and will trade those for much smaller properties," he said.

Finally, as most real-estate professionals stress, there are definite financial rewards in real estate for those with a long-term plan — despite the valleys that inevitably pop up. People who intend to live in their homes for at least several years can weather most markets

"It's all long term," Campbell said. "You have dips in the stock market daily," she said, so those who own real estate should expect that they'll see dips in appreciation as well.
"If you're in over five years, you're going to be fine," she said.
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Twenty-Minute New Year’s Resolution

For New Year's 2007.
Full Article:
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