Investing in Real Estate 102

If you've spent any time looking at real estate—even on the internet, you've found there are at least two different types of properties, residential and commercial. Residential is comprised of houses, condos, duplexes, apartments and so on. Both of these types of properties took a haircut during the last recession—they were all a part of the bubble and they all profited from the lift in the market price of properties.

Today, residential properties are selling at a great rate, and although many are being bought by investment groups, most are being purchased by people who expect to live in them. And they’re buying for cash. Because the prices are affordable right now, a cash deal relieves a buyer of having a mortgage payment as they get by on Social Security and fixed incomes.

Sometimes an all cash transaction happens because the buyers are “from away”. If you are a Canadian, for example, don't bother trying to get a mortgage in Florida. You get your loan in Canada, and bring the check to the closing table here—meaning, even if you have to get a loan (perhaps a home equity loan on your Toronto residence), when you use the proceeds here to buy the beach front house on Manasota Key, we will see it as a cash deal.

But let's talk about commercial real estate. This is the investment arm of the real estate market. Oh I know people say they have invested in a home and it will probably grow faster than the stock market. But really they have not invested, they are speculating on residential real estate. If you don't think so talk to all the folks who bought “investment homes” over the last 5 years. Speculation really is a “fingers-crossed” investment, and works out about 50% of the time.

Obviously commercial properties are not residences. They are the doctor's offices and the retail stores up and down Main street, the warehouses a couple of blocks back and the malls and hotels and golf courses, and all the vacant lots that are zoned commercial which one day may become a McDonald's or a Walgreen's.

The barrier to entry in this type of investment is higher than residential, the cost of entry is usually substantial. But the market is less fickle and there's nothing like a good lease from a well known tenant. Back in the day, the best investments were Kmart leases. These were paying a significant annual profit, your investment would be pooled with other investors and as a group you would participate in a limited partnership to buy one or more buildings, and then rent them to Kmart. Sometimes these were called purchase, lease-back deals and you could make 15% maybe 20% on your money. True investments come with a known--or at least projected--rate of Return On Investment (ROI). Even today I know one investor who owns 6 United States Post Offices. Love them or hate them, they pay the rent on time.

And one of the interesting things about Commercial vs. Residential is the two markets tend to peak at different times, almost as though when one is up, the other is down and vice versa. Residential real estate began it's slow recovery about 3 years ago, (really when it seemed it could go down no further), and it's been climbing back ever since. If you had to sell during that time, I'm sorry. The good news on residential is it has another 2-3 years to grow, some say 5 years still to grow.

But if you didn't have to sell then, now is the time to rethink your real estate portfolio. Take a clue from the big builders who are constructing homes all over the counties, with the knowledge that there are buyers, and there will be buyers in the future. Even when the final blip of the phantom inventory hits the market, (which will be in direct competition with their new homes), the new ones will be selling.

But back to commercial, things are just now turning around for commercial. Buyers are stepping forward, and vacant buildings are being gobbled up. As a landlord of a prime commercial property, you should be able to expect a net net net lease with a 20 year duration that will have escalator clauses so that you have a fixed rate of rent the first year, but you might have a clause that increases the rent based on the cost of living as set by the Federal Government—or any of a dozen other kinds of escalations. One of my favorite is based on the annual gross of the tenant. If they're having a good year, the landlord should too, right? (And net, net, net means the tenant pays everything including the taxes.)

Three years ago I told you the residential market was at the bottom—and I was right. Now I'm telling you the commercial market is starting to come back. Talk to your investment advisor about how you can take part in that market's success with a sector fund or mutual fund in the real estate field, or call a Realtor and ask about commercial opportunity right here. There are some nice buildings—plums waiting to be plucked—right here in Englewood.

Dane Hahn is a real estate professional practicing in Sarasota and Charlotte counties. You can reach him at dane.hahn@gmail.com or by phone at 941-681-0132. See him on the web at www.danesellsflorida.com

Real Estate Market Cycles, 5 more good years

Our local daily paper ran a six column headline this week stating: “Home sales, prices up”.  What a happy turn of events given the last 5 years or so, when almost all of the news stories have been about the fall of real estate—and now the market is climbing faster than the editors seemed to think was possible.

I won’t go into the details, except to say those of us who live our lives in the real estate marketplace agree that the news is accurate for a change, the market really is going up.  The buyers are back and the sellers could not be happier. We are on the leading edge of the new real estate market, and the prices are as low as they are likely to be for another dozen years.

Typically the residential real estate market swings up and down in a 12 year cycle

The normal pattern of real estate price movements is a smooth curve, 6 years upward and 6 years or so downward.  The cycles have a similar length, 6 years of building to a high market, and six years of weakening and tightening.

The recent “Great Recession” redrew the graph, but it appears we are on the uptick of a six year cycle, with perhaps the first year already behind us, meaning that we may have a good 5 years still to go. The last year didn’t seem good, but it was the turn-around year and grew into a solid year one cycle.

The firm—which is now called Case-Shiller—was once just a couple of economists, and they postulated that the housing boom of 1983-1988 could be explained using a consumer phychology approach—when certain financial situations were in place. During that time period, house prices doubled in many parts of the US, and they interviewed both buyers and sellers.

In their interviews they found that the driving forces of that boom time rested on the perception of the public. An especially striking feature of the answers, noted Case and Shiller, is that not a single respondent referred to explicit quantitative evidence relevant to future supply of or demand for housing.

Buyers never cited any concrete evidence about the economy, or housing supply. Rather than being based on objective economic facts, the optimism of buyers was based on mutually reinforcing conversations. I like to call this cocktail chatter.  Everybody at a cocktail party talks about real estate, and almost never talks about fundamental economic factors. Conversations like: “Housing prices are booming,” said the buyers polled by Case and Shiller.  And these folks tended to worry: “Unless I buy now, I won’t be able to afford a home later.” The moral is simple: do not always believe that the current markets growth is due to ‘fundamental’ factors.

And what are these fundamental factors?

Increases in national income (GNP). A 1% increase in GNP growth was associated with a 1-4% rise in real house prices after three years.

Reductions in interest rates. A 1% reduction in the short-term interest rates is associated with ½ to 1 ½% increases in house prices within a year.

Equities prices increases. In the US, a 10% equities price increase causes about a 1% house price increase over three years.

So the fundamentals are in place for a booming market over the next 4-5 years. Yet above all, buyers pay attention to what other buyers are saying and are prepared to pay. So there is no perfect market driven by external news but rather a predictable market, feeding on itself.

Today you actually can still make real money trading houses.  And I’m happy to share my time-tested system with you:  buy low, and sell high.  Your profit is the difference (between the buy price and the sell price, less the transaction expenses and costs of fix-up).  But here’s the secret, since you can’t control the selling price, you must control the buy price.  All your profits are established in your purchase price. 

Step One is to buy low when the market is weak but rising—like right now.  But what’s the right price?  Ay, there’s the question, and it’s one I can help you with.  Just remember, this is a great time to buy.

Dane Hahn is a real estate professional.  You can contact him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the net at: http://www.danesellsflorida.com/

Sink Hole Swallows Man as he Sleeps

Did you see the TV coverage of a wrecking crew demolishing the Tampa home of a man who was killed when his bedroom was swallowed up by a sinkhole while he slept? What a way to go. One second you are asleep, the next the bedroom falls 30 feet into the ground and the sand slides down over you. The scene was so surreal that the officials decided not to even try to recover the body.

Usually you don't see sinkholes in the headlines, but the risk of sinkholes is common in Florida due to the state's porous geological bedrock. Usually a parking lot suddenly has a crater in it or the floor of a house or garage cracks--and that's it.  But in truth, many of the lakes in Florida are relic sinkholes which are classified as geologic hazards sometimes causing extensive damage to structures and roads and resulting in costly repairs. Sinkholes can also threaten water supplies by draining unfiltered water from streams, lakes and wetlands directly into the aquifer (underground water supply).

Florida's Association of Realtors offers a disclosure form for members to use (on line) that invites a seller to “disclose” any knowledge of sinkholes, including land movement or settling. And the form goes on to ask if a sinkhole did occur, was there any insurance paid to mitigate the problem—and if so, was the insurance money spent on that repair (I suspect they want to be sure the seller didn't take a trip to Hawaii with the proceeds). But if you suspect ground settling, you can ask your insurance provider, they have all the latest maps.

Sinkholes are an ongoing concern for Florida residents and lawmakers. Sen. Jack Latvala,R-Clearwater, identified sinkholes as one of the primary factors in property insurance costs in the state.
"In our area, we have a substantial problem with sinkholes," Latvala said of trying to get a grip on property insurance costs that have led to an increase in premiums.

From 2006 to 2010 the number of sinkhole claims in Florida tripled, costing insurers a total $1.4 billion over the period, according to the Florida Office of Insurance Regulation. In response to insurers’ assertions that many claims were fraudulent and burdensome to the industry, the Florida legislature passed a new law limiting sinkhole coverage in 2011. The change has made it hard for Florida homeowners to get meaningful sinkhole coverage.

Despite the reduction in coverage, sinkhole insurance premiums have increased—for example, the rate for sinkhole coverage this year rose almost 25% at Citizens Property Insurance, Florida’s largest property insurer. The number of sinkhole claims received by Citizens already had decreased by 30.4 percent in 2012.
Most sinkholes in Florida are found north and east of Tampa Bay, but sinkholes can and do pop up elsewhere in the state, including the Suncoast and Southeast Florida. Maps of sinkhole activity are easily found on the internet. These maps offer a clue as to why certain regions in the state -- like Hillsborough County -- are most susceptible to sinkholes. Most of Southern Florida is at low risk for sinkholes and those that form in the region are shallow and form gradually.

Sinkholes can range widely in size, but all are a result of the dissolving of the underlying limestone. As rainwater filters down into the ground, it dissolves the rock, causing erosion that can lead to underground caverns, which cause sinkholes when they collapse.. Too much or too little rainfall can contribute to sinkhole formation, as can human activities like pumping out water from the aquifer and building construction.

Dane Hahn is a real estate professional serving Sarasota and Charlotte counties. He can be reached at dane.hahn@gmail.com or by phone at 941-681-0312. See him on the web at www.danesellsflorida.com

Prudential to become Berkshire Hathaway

When you think about real estate, you probably thinkof those firms whose names you know, like Century 21, and Coldwell Banker and Re/Max, that's because they spend more money promoting themselves and their brand name than almost any of the independents do. And yet 41 percent of Realtors are not affiliated with these “big brands”, but instead work with an independent agency. Some of the agents prefer the independents because as a rule they are smaller, sometimes “mom and pop” shops, and because they normally don't charge the fees and expenses that the franchises do.

The Great Recession brought hard times to all the agencies, the difficult market conditions, including high unemployment, restrictive lending, and a long-suffering economy, forced many brokerages into scaling back offices and agents. Re/Max, for one, has seen a net loss of 700 offices in the past two years. As a matter of fact, most national franchise brands have been contracting in response to lackluster real estate market conditions--one notable exception is Keller Williams, which has continued to see a net growth in agents and numbers of offices.

This week the new Berkshire Hathaway Home Services brand was unveiled by HSF Associates at the annual Prudential Real Estate Sales Convention, signaling another defining moment in residential real estate. Warren Buffett wasn't there, but from the stage of Caesars Palace in Las Vegas, Prudential real estate agents and brokers got a first-hand look at the brand’s new visual identity, soon enough you'll see Berkshire Hathaway on every Main Street across the US. Late last year, they purchased a majority interest in the affiliate networks of Prudential Real Estate, and had formed HSF Affiliates LLC, which will operate the existing franchise network, and presumably introduce the Berkshire Hathaway name change.

Do you think the franchises are smallish business? Think again, franchises are big business, and they bring a “national brand” awareness to even the smallest real estate firms. But more than just a familiar brand, they are providing a renewed focus on agent productivity, retention and training. Indeed, today’s market challenges are giving many franchises an edge in their recruiting and inspiring others to forge new partnerships as they look to chart a stable future.

Last year ERA Real Estate announced its affiliation with New Orleans–based Latter & Blum. L&B retains its identity as a strong local brand established 95 years ago but now has access to ERA’s resources and national network through a new program called ERA Powered.

In another notable strategic pairing, the fast-growing Casa Latino franchise, which specializes in the Hispanic market, announced that it would become part of Nextage Realty International. Although the new company will still serve its targeted multicultural clients, the move is designed to give franchisees broader growth opportunities.

And even private mom and pop brokerages that desire to stay independent are joining large networks of affiliated companies like the Chicago-based Leading Real Estate Cos. of the World. In that kind of arrangement, they can obtain many of the same benefits that brokers and salespeople at franchises have. These can include everything from lead generation programs, branding, and marketing materials to blogging platforms, training, and professional development opportunities. Leading RE’s 580 companies together were responsible for $225 billion in sales last year, a higher volume than any single national franchise brand.

Smaller franchise companies like Flat Rate Realty, which has 50 agents operating in 17 offices, differentiate themselves with incentives like buyer’s rebates. These rebates can be worth as much as 50 percent of the buyer agent’s commissions--which have increased business by 25 percent over the past two years.

As a long time Realtor, I have worked for both Indies and Franchises—both have their high points and their low points. I can tell you the franchises generally provide a management framework for the owners. For the agents they offer leads (from their other franchisees), sales training, advertising and signage, and high tech websites and texts. What they offer the owners is financial tracking, agent retention and management discipline. The franchises monitor the business, keep track of the agents and frown on wasting time. Whereas the mom and pop shops are usually less restrictive and more understanding of a day off to go fishing...

Dane Hahn is a real estate professional serving Sarasota and Charlotte Counties. He can be reached at 941-681-0312 or by email at dane.hahn@gmail.com. See him on the web at www.danesellsflorida.com.

New Vision for Housing Policy

This week a bipartisan commission of leading housing and economic experts unveiled a new vision for housing policy. If adopted, the plan will be to further our nation’s economic recovery and improve the lives of millions of Americans—then again, right now it’s only a plan. Six years after the collapse of the housing market, the underlying problems in housing remain, and government solutions continue to be elusive.  The commission hopes their “vision” will serve as a catalyst for action.

The recommendations propose scaling back the government role in the nation’s housing finance system and reforming housing assistance programs to better meet the needs of America’s most vulnerable households.

The report proposes a new housing finance system that calls for a far greater role for the private sector, a continued but limited role for the federal government, the elimination of Fannie Mae and Freddie Mac, and reform of the Federal Housing Administration to improve efficiency and avoid crowd-out of private capital.

Through these reforms, the plan addresses the broken mortgage finance system while creating a path to a stable and strong housing market designed to provide greater taxpayer protection and support a more vibrant economy.

At the core of this plan are the perceived needs that have gone unfilled. As demonstrated in the recent presidential election, profound demographic changes are transforming the country and our housing needs. The increasing diversity of the American population and it’s intrinsic economic issues, the aging of the Baby Boomers, and the formation of new households by millions of young Echo Boomers striking out on their own, all present new challenges.

The plan presented this week calls for reforms that would establish a new performance-based system for delivering federal rental assistance with greater devolution of responsibilities to state and local providers. The commission also proposes to shift existing resources to assist the poorest households, and to expand the Low Income Housing Tax Credit program to increase the supply of affordable rental housing.

For first-time home buyers, the report emphasizes the importance of housing counseling as a means of preparing for homeownership. The commission feels that “government knows best” and so offers recommendations for the young as well as proposals to enable seniors to “age in place” safely and affordably while integrating housing with health care and other programs. For the one-third of Americans who live in rural areas, the commission recommends continued support for homeownership and rental assistance in those communities.

To read the full report of the Bipartisan Policy Center’s Housing Commission, please visit http://bipartisanpolicy.org/library/report/housing-future.

Dane Hahn is a real estate professional serving clients in Charlotte and Sarasota Counties. He can be reached at dane.hahn@gmail.com or by phone at 941-681-0312, or on the web at www.danesellsflorida.com