Wednesday, December 28, 2011

The Unreliability of Home Valuation Websites

           In the shifting sands of today’s real estate market how do you get a true view of the value of a property?
For years, realtors were the gatekeepers to that information.  In fact, supplying a recommendation for what you might sell your property for was part of their job description. An individual could access that information – with painstaking difficulty, visiting the courthouse for tax assessments and for sales prices of comparable properties.
But in today’s instant access to online information – all that has changed.  With the click of a mouse you can visit Zillow or and get an estimate in seconds – with no real estate agent attached.
A blessing for consumers?  Maybe, but it’s mixed at best. Both sellers, buyers and even voyeurs are finding online real estate estimates change at an alarming rate.
In The Fuzzy Math of Home Values on SmartMoney.Com (, Alyssa Abkowitz describes some astonishing examples of inaccuracies on popular home valuation websites. For example, Jason Gonsalvez found his Sacramento home was valued on one site for $550,000  - $200,000 below his mortgage, on another for $640,000. But the real- life appraisal for refinancing was $1.5 million. And that’s just one example: inaccuracies abound. According to Abkowitz, “Evaluations that are 20, 30 or even 50 percent higher or lower than a property’s eventual sale price are not uncommon."
And there can be adverse consequences. An inflated valuation can give home owners an unrealistically high expectation of what their home is worth and make them inflexible on pricing. A too low estimate could encourage buyers to make low ball offers on property they believe is over priced.
So what’s a consumer to do?
Until these websites improve, consider their estimates much like weather predictions, or hot tips on the races; guesstimates at best.  If you want to determine the value of a property – accurately – the best way is the old-fashioned way: find a good real estate agent. 

Friday, December 23, 2011

Are Echo Boomers Holding Back the Housing Recovery?

One reason for the housing slump that has been less discussed is the reluctance of Generation Y (those born between 1980 - 1995) to purchase housing (  Peter Reilly in Forbes has stated that only 13% of Gen Y'ers own homes and only a third express an interest in ever owning one.

Reilly provides a number of reasons for these feelings:

1)  Gen Y'ers are more interested in spending money on experiences like traveling than they are in saving for a home;
2)  Gen Y'ers don't want to be tied down to a specific place for very long;
3)  Gen Y'ers want the amenities of urban living that they can only afford by renting.

I would add a couple of my own:

1)  Gen Y'ers are skeptical of owning real estate because of the recent housing crash;
2)  Gen Y'ers are saddled with education debt, which makes it harder for them to get a mortgage.

Whatever the reason for this generational phenomenon it creates great opportunities for landlords.  Gen Y'ers are inclined to rent so whoever can figure out what types of apartments they are looking for can profit from this trend.

Saturday, December 17, 2011

Addressing Real Estate Agent Critiques in Freakonomics

I just re-read the critiques that Steven Levitt and Stephen Dubner make about real estate agents and I think they need to be qualified.  Levitt and Dubner's point is that real estate agents only gain a marginal benefit by negotiating a higher price for a seller so agents just try to close a deal quickly and leave money on the table for sellers.  To prove this fact the authors reference a study "that found an agent keeps her own house on the market an average ten extra days, waiting for a better offer, and sells it for over 3 percent more than your house."

1)  Refuting myth No. 1 - Keeping a house on a market longer leads to a higher price.

Levitt and Dubner wrote their book in 2005 when the housing market had been booming for several years.  Perhaps at that time leaving a house on the market longer would have lead to a higher price but now leaving a house on the market usually leads to significant price reductions.

2)  Refuting myth No. 2 - Real estate agents are simply looking to close deals quickly so they don't care about getting top-dollar for their seller clients

Everyone has probably met an unscrupulous real estate agent at some point.  They don't last long in the business though and they never make much money.  Successful real estate agents take a long-term approach to the business.  They want to treat every client well because they hope the client will refer them other business and the client will work with them in future years.  An agent's reputation is everything to their business and if they shortchange a client it will significantly harm the agent's business in the future.  Since Leavitt and Dubner are so interested in economic incentives they should realize that real estate agents have the most economic incentive to treat their clients well.

Thursday, December 15, 2011

Petitioning to Remove Private Mortgage Insurance (PMI)

As you hold an investment property you can continually look for ways to reduce costs and boost your yield.  If you put less than 20% to buy the property you will invariably be paying private mortgage insurance.

The good news is that you don't have to wait until you have paid down the principal enough so that it reaches 20% of the original loan value.

After a certain amount of time you can petition the bank to remove the PMI.  Here is a representative case:

After 24 months of on time payments you can request that the bank remove the PMI.  This request is based on the current market value of the property.  In essence what you are saying is that the property has increased in value giving you a current loan to value of less than the required amount to remove PMI (75%).  The one thing you have to pay for is a Broker's Price Opinion or (BPO), which costs $125.  The bank will then hire a broker to do a comparative analysis on the property and see if your valuation is correct.  If it is you will save years of unnecessary PMI payments for an investment of $125.

Sunday, December 11, 2011

Contrasting Views on the Future of the Northern Virginia Housing Market

The Washington/Northern Virginia Real Estate Market has continued to outperform the rest of the country, but can this continue? What forces will shape the real estate market in the immediate future and in the years ahead?
As they gaze into their crystal balls trying to see where the market is headed, pundits – on the upside and downside - highlight outside forces and trends that may be transformational … or not.
On the downside Bryant Ruiz Switzky writing in the Washington Business Journal on 11/21/11, projects the negative effects on the region of automatic federal spending cuts that should go into effect in 2013. These cuts triggered by the congressional supercommitttee’s failure to reach a deficit reduction deal would hit the region hard, according to George Mason economist Stephen Fuller.  Specifically what does this mean for Northern Virginia?  Fuller estimates that cuts in military equipment spending would cost Virginia job losses reaching 122, 770 and $7.2 billion in lost earnings.  Sounds terrible for the real estate market, as well. But most pundits, Fuller included, feel that politicians will find a way around these cuts in an election year.
On the upside a recent analysis predicts that the D.C./Northern Virginia area will add more than a million new jobs by 2030, far outweighing the effects of federal spending cuts. According to Brady Dennis writing in the Washington Post (D.C. area is behind the curve on housing and jobs forecasts, 11/21/11), the study found that based on those projections the region will need as many as 731,457 additional units to house workers in the area where they work.  That means producing about 38,000 new housing units per year. 
Of course, the doomsayers worry that local communities won’t be able to meet the demand for new housing thus causing businesses to relocate to other areas and reversing the employment boom. But that doesn’t have to happen.
It will take planning and innovative new approaches to create communities where people want to live, raise families and work.  But when you think about it, that’s not a bad problem to have to solve. And the benefits to the real estate market will be tremendous.

Tuesday, December 6, 2011

Jim Collins v. Malcolm Gladwell on Success

After reading Great by Choice by Jim Collins and Outliers by Malcolm Gladwell, I've been thinking about their different views of how someone becomes successful.

In Outliers, Malcolm Gladwell emphasizes the importance of luck to the success of many great people.  For instance, he describes how lucky Bill Gates was to have access to a computer at the University of Washington when he was in high school.  Computers were a rarity in those days.  Gladwell also informs us that the Beatles were lucky to be given the time to hone their craft for so many hours at clubs in Hamburg, Germany.  Performing 8-10 hours a day in Hamburg enabled the Beatles to get to the necessary 10,000 hours of practice necessary for excellence.

Gladwell raises a good point.  Gates, the Beatles and others had some very special opportunities afforded to them.  However, his analysis undervalues the efforts that these extraordinary individuals put in to achieve mastery in their fields.

Jim Collins does a good job of quantifying the importance of those efforts.  He calls it return on luck.  In studying how great companies flourish in uncertainty, Collins determined that great companies and their competitors both experienced good and bad luck.  One of the things that made the difference between them though is the efforts they took to take advantage of the good luck and minimize the damage from the bad luck.  Based on the "fanatic discipline" and "empirical creativity" of their leaders the top companies excelled in turbulent times.

You can see this in the example of Gates and the Beatles as well.  Gates took advantage of the availability of a computer at the University of Washington from 3 am to 6 am in the morning to practice programming.  That was fanatical.  Sure he was lucky to have that opportunity but no one else wanted to do that.  It was an enormous sacrifice and extremely disciplined.  We can't discount that.  The Beatles also worked exceptionally hard.  Bands weren't just lining up to play 8-10 hour gigs in Hamburg for several months straight, for meager compensation.  But they worked that hard because they felt they needed to in order to succeed.

Both authors have contributed much to this field.  I guess the lesson is we should be grateful for the opportunities that come our way and be prepared to take the most advantage of them that we can.