Zestimate Bullshestimate

Just the other day—at our company Christmas Party--some of the conversation turned to Zillow. That's the on line automated real estate site that estimates the value of nearly every house in America. Right or wrong, millions of consumers are clamoring for their data since they provide a no-obligation idea of what your house—and those of your neighbor's up and down the street—might sell for. In a housing market that's been mostly a cause for gloom, so-called home-valuation technology has become one of the few sources of excitement.

The question that we debated, over a couple of beers with carols playing on the CD, was how accurate are these estimates? After years of us real estate pros holding all the informational cards in the home-sale game, Web-driven companies like Zillow, Homes.com and Realtor.com all want to be consulted when you are trying to determine the likely selling price of a home. Probably your home.

For most of real estate history, of course, determining a home's value has been the appraiser's job. Appraisals involve gathering data on recently sold homes in a given area and comparing them with the "subject property" on matters like size, bedrooms, bathrooms, garage, general condition and other characteristics, before coming up with an estimate of the home's worth. If the property has, say, a 4th bedroom, but most of the recently sold homes don't, the appraiser might add a premium to the sale value. This exercise involves as much art as science, as anyone who has done a few will attest..

The more unique or luxurious a property, the harder it is to accurately value. Subject properties may be so unique that no comparable properties can be found. You only have to tune into HGTV's unique homes shows to see what I mean. Where will you find another home that rotates to use as a comp? Or another one made out of old airplane parts that might have recently sold?

Buyers use the web site estimates to get a feel for what's on the market and, later on, to figure out whether their offer will entice a seller to play ball. Sellers might check their home's value to help decide whether it's worth the hassle of selling or just refinancing, even some Realtors use them to gauge if their listings are priced right for the market. As a practicing real estate agent, I'm increasingly resigned to spending time with potential sellers answering questions about the estimates.

Realtors know the estimates are wildly inaccurate. Valuations that are 20, 30 or even 50 percent higher or lower than a property's eventual sale price are not uncommon. The estimates frequently change, too, for reasons that aren't always easy for homeowners to discern. According to the web companies themselves, some quotes have swung by hundreds of thousands of dollars in as little as a month as new data gets plugged into the algorithms the sites rely on.

And the sites acknowledge that people like you and me can enter information that might push estimates higher. The sites invite you to add photos, and make corrections.  But what I'm trying to say here is a Trulia or Zillow estimate is just that -- an estimate.  Zillow even publishes precise numbers about how imprecise its estimates can be.

Every major site urges home-price hunters to always consult with a real estate agent or house appraisal specialist. And yet, consumers and pros alike say many homesurfers put their faith in the estimates to sway the way they shop and sell.

Since 2006 Zillow has been providing it's “Zestimates” to the masses. The company runs data on more than 100 million homes through its own algorithms that recognize relationships between property characteristics, tax assessments and recent transactions. Indeed, in a market where listing prices often reflect more hope than reality, some agents say that online tools are a useful tool—if only to open discussions with sellers.

Their iffy accuracy notwithstanding, critics say the sites' business models may pose a bigger problem for consumers than their algorithms. These online firms earn significant revenues from their advertising, and the more traffic they get, the greater that ad revenue is. Their advertisers are the likes of home-supply store Lowe's, realty franchisor Century 21 and builder KB Home. Meaning on the one hand they provide a free service to shoppers, and on the other they sell a service to the real estate industry—but think for a moment, who's their daddy?

Dane Hahn is a real estate professional in Englewood Florida. He can be reached at dane.hahn@gmail.com or through his site, http://www.danesellsflorida.com/.

Should Banks Pay it Forward?

Secret Santas are cropping up around the country. These are people—who mostly anonymously—give money as a Christmas gift where it was least expected. A little old lady toddles into a Walmart and pays off a dozen or so lay-away accounts, so the folks who were buying a TV or some toys on time, all of a sudden find their final payments have been made, and the goods are theirs. Wow, it's Christmas.

Some find a way to slip a gold coin or a big check into a Salvation Army bucket, and quietly, more good is done.

Today I watched a down and out fellow get a $100 bill from a complete stranger. The benefactor was visiting soup kitchens and generously gifting money. Yes, he's giving money, but really he's giving more than money to the folks who were doing all they could to cope. He was offering a belief in their ability to be good, providing them chance to evaluate their life and maybe make a change. As he said, “I'm not judgmental. If my effort can help make a change in a couple of lives, then I'm a success too.”

These efforts at Christmas kind of make you want to see that old film, “Pay it Forward.”

To a large degree, what our real estate based economy needs right about now is a Secret Santa.

Naturally, Secret Santas can't be fair. To be fair they'd have to give everyone a surprise gift—and all of a similar value. No, a real estate Secret Santa would have to reach into the morass of tangled loans and foreclosures and somehow catch-up the loans of some of the neediest borrowers. They would just zero out the deficiency, and give the borrower a new start.

Of course that couldn't happen. There are too many people, too far behind to be able to help them all—but what if, just a few, maybe there is a way. What if all banks who had made loans to home buyers looked over their outstanding loans, and zeroed out the bottom 2%. Not pay off the house, but “catch up” the borrower, so that the loan would be “up to date”, with nothing overdue. Next month's payment would still be due, but the slate would be clean. How about that?

I would submit that maybe even the bottom 10% of a given bank's mortgagors are going to lose the house anyway. So what's the risk to the bank? The chances of the bank actually receiving any of the past due amounts are slender given our flacid economy, but if a fresh start could keep the folks in the house, then both the bank and the family would be better off; if a fresh start could result in some percentage of the residents picking up and turning the mortgage into a “performing” loan, then like the Secret Santa, the bank would be a success in the community too. Could it happen?  Probably not, but then it is Christmas...

On another topic, the “flood insurance” topic reappears for the third time this year. Congress seems not to be able to vote for a simple bill that would allow the continuation of Federal Flood Insurance. The problem with flood insurance lapsing (over and over) is that homes which are sold and about to close but which are in flood zones, can't close without the insurance and so not until Congress reinstates flood insurance. Why is this such a hard topic for all those lawyers in Washington? I write to my senators and reps, but with no results.

But I forgot, they're the ones who determined that our traditional incandescent light bulbs could no longer be sold, in favor of florescent bulbs, and then this week, changed their minds. I would love to see the cost of this “double” legislation. The cost of passing the first bill, the cost to retailers to adjust their inventory, the cost to manufacturers to accommodate the newly perceived demands, the cost to consumers to switch over at least some of the bulbs (the 3-ways are just awful) and the cost to change their minds back to again and allow the bulbs. Maybe it's not in the Trillions, but you can be sure it was expensive and is just another of Washington's leadership boondoggles. November 2012 can't come soon enough.

Dane Hahn is a real estate professional practicing in Englewood, Florida. He can be reached at dane.hahn@gmail.com or at http://www.danesellsflorida.com/.

Even the Newspapers Are Suffering

This week I had the pleasure to attend a breakfast presentation by Diane McFarlin, who is the Publisher of the Sarasota Herald Tribune. I think it's worth taking a few minutes to discuss how it is that the Herald Tribune (a New York Times owned daily newspaper) is weathering the downturn in the economy.

From my perspective, the world revolves around real estate. In the newspaper business, the world revolves around advertising and to a lesser degree, subscriptions. Interestingly over the last three or four years, the Herald has lost more than half their advertising base, albeit their readership is holding pretty well. The loss of their advertising has been to the internet, some of it to other fragmenting media, and some of it to the general  slow-down and loss of business. They have lost most of their real estate advertising and a meaningful amount of their national advertising. The likes of Craig's List and eBay have heavily impacted their classifieds in all categories.

They are countering these changes by adding new websites and serving their readers with other electronic and print products, and of course by continuing their effort to cut expenses. They have sold 60% of their bureaus throughout the three counties they serve, they have halved their personnel and are considering additional changes to the newspaper to save on their financial outgo. These are severe cuts that were difficult decisions, but have resulted in their staying in business, even though more cuts may be necessary.

But these hard decisions should result in future health. And hard decisions are the very thing we are asking our Senators and Congressmen to make before--unlike the newspaper--we are blindsided by our unwillingness to get our head out of the sand. The paper realized that times had changed, and that only well managed and tightly run businesses would survive. Now we—you and I-- have to be sure our lawmakers at every level do the same.

So what's up with real estate? Well things are looking up a little. Home buyers scooped up more previously owned homes last month slowly putting a dent in the huge inventory on the market. Sales of existing homes rose 1.4% last month to an annual rate of 4.97 million homes, the National Association of Realtors reported.
Foreclosures and short sales dropped to 28% of sales in October, down from 30% in September. Even as the stockpile of homes on the market eases, housing prices are continuing to dip. The median price for an existing home was 4.7% lower than a year ago. That means it's still a great buying opportunity for house hunters.

But one of the problems preventing the housing market from making a full recovery is that many of the home buyers attempting to buy houses are seeing their mortgage applications rejected. Contract failures, which include declined mortgage applications or failures in loan underwriting because of problems including appraised values coming in below the negotiated price, jumped to 33% in October, up from 18% in September.

Home sales have been stuck in a narrow range despite several improving factors that generally lead to higher home sales, such as job creation, rising rents and high affordability conditions.

New-home sales edged slightly higher last month, as more Americans hunted for bargains in the struggling housing market. The Census Bureau reported an annual sales rate of 307,000 new homes last month, up 1.3% from a downwardly revised rate of 303,000 homes in September.

Compared to new home sales a year ago, there were about 162,000 new homes on the market by the end of October. That represented a 6.3-month supply at the current rate of sale. The median sale price was $212,300.

Last week, a separate report showed that more house-hunters are also eyeballing previously owned homes. Inexplicably, an increasing number of home builders are planning to build houses and are breaking ground on new construction, with building permits and housing starts climbing.

Dane Hahn is a real estate professional practicing in Englewood Florida and New Hampshire. He can be reached at 941-681-0312 or 603-566-5460  or try http://www.danesellsflorida.com/

Want To Make A Quick $200,000? Not so fast...

Our daily paper from Sarasota led this week's real estate “buzz” page with a item on flipping homes. The headline read “Investor Makes A Quick $262,200. Not bad—I know you will agree—heck, I'd like to make a quick $200K. And if he can do it, you and I can do it too—don't you think?

Looking a little closer at his transactions, Ed Thornburg bought a house in Bradenton, for $160,500. He bought a condo in Sarasota for $22,100; he bought a house in Palmetto for $26, 100; and he bought another house in Palmetto for $98,800; and finally, he bought a house in Bradenton for $269,900

His purchases add up to $577,400, and he has since sold three of them for $262,200 more than he paid. (I think the ones he still owns are the one in Bradenton and one of the Palmetto houses. So even if he sits on these two homes through the balance of the year, he's only sitting on an investment which cost him $186,600.

But hold on a second, investors rarely pay cash for the homes they buy, maybe 20% down is all they lay out. On the return trip however, when they sell the homes, they get 100%. To make a simple example, if an investor buys a $100,000 house, he will have 20% down, plus some expenses of closing, insurance fix-up and the like, so think $20,000+/-. But when he sells the house for, let's say $150,000, he will have a net profit of $50,000 (and get his $20,000 back as well). So the guy who had $20,000 in July when he bought the house, now has $70,000. This of course ignores carrying costs, and other fees, including Realtor commissions, but in general you see why people think this is a great idea.

I would caution you about the late-night ads that will suggest you can make as much money on flipping one house as you have in the last year at your job. These TV gurus don't look or sound any smarter than you are and they say they're raking in the cash. Remember, they're selling books, not flipping homes.

Well, trust me--it's not as easy as it looks on TV. The price run-up of the past few years led thousands of people to reach the conclusion that flipping homes will make money for them. There is a boatload of competition out there, which means that the obvious deals (call them sugar plums) are gone in a heartbeat. The pros will tell you that they make their money on the front end by buying properties for at least 30% below market value. Finding those houses takes time and once you find them, you'll need to move fast. And no matter what the late-night gurus say about doing this with no money down, it just never works that way. That means you'll need access to cash to do the deal, not to mention the rehab.

Remember Richard C. Davis, owner of Charleston-based Trademark Properties, and creator and star of A&E's reality show, "Flip This House"? He says no one can watch his show and get the impression that this is an easy way to make a living. The show is now canceled—maybe it'll come back but flipping is not something that the public at large ought to do. In his original video series, Davis told the viewers not to try this at home. It's for trained professionals. You will lose money.

And there's a ton to learn:

1. You'll need adequate savings to pay all the bills.
2. Your hair will go gray while money is flying out the door for cabinetry, plumbers and plants.
3. Keep track of your contract to purchase, if you don't close in a timely fashion, the sellers can keep your deposit money,
4. Remember to pay the insurance, the utilities and the maintenance.
5. Oh, and contractors won't renovate a house for free.
6. You'll probably need to hold on to the house for at least three months because of Federal Housing Administration (FHA) anti-flipping regulations. Houses sold less than 90 days after they were purchased aren't eligible for FHA mortgage insurance; those sold between 91 and 180 days are OK but require an additional, independent appraisal to make sure the sales price is justified.
7. Every day you own the house costs you money in interest, utilities, taxes and insurance.
8. Taxes. Oh right! As far as the IRS is concerned, buying and selling real estate as an investment strategy and doing it as a business are two very different things. If you buy a house, fix it up and resell it while you're working another full-time job that provides the bulk of your income, that's an investment and the proceeds will be taxed as capital gains. So talk to a CPA.

So before you get “flipping-envy” remember guys like Edward Thornburg are few and far between—that's why his making any money flipping homes this year is news-worthy.

Dane Hahn is a real estate professional practicing in Florida and New Hampshire. You can reach him via dane.hahn@gmail.com or http://www.danesellsflorida.com/

What Did You Learn From the Real Estate Meltdown?

I just finished reading Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner. The authors make a strong case that the recession and real estate melt-down was a simple case of greed at many levels, and they feel that most of the really bad guys are still known to us and today are very rich.

They trace the beginnings of our real estate collapse to the mid-1990s, beginning when the Clinton administration called for a partnership between the private sector and Fannie and Freddie to encourage home buying. The governmental support was in fact a subsidy to increase home ownership, which enriched Fannie and it's C.E.O., James A. Johnson. So far so good but then the Congressional Budget Office found that Fannie pocketed about a third of the subsidy rather than passing it on to homeowners. And over his nine years heading Fannie, Johnson personally took home roughly $100 million. His successor, Franklin D. Raines, was treated just as lavishly.

To entrench Fannie’s privileged position, Johnson and Raines didn't keep all the largesse, they channeled some off to members of Congress—contributing to campaigns and handing out patronage positions to relatives and former staff members. Fannie paid academics to do research showing the benefits of its activities and playing down the risks, and shrewdly organized bankers, real estate brokers and housing advocacy groups to lobby on its behalf.

American taxpayers were unknowingly handing Fannie billions of dollars each year. Countrywide Financial (now a failed division of Bank of America) became Fannie’s single largest provider of home loans and the nation’s largest mortgage lender. Countrywide abandoned most traditional lending standards altogether, and even doctored loans to make applicants look creditworthy, while generating a fortune for its founders.
Meanwhile, Wall Street banks received fat fees underwriting the securities issued by Fannie and Freddie, and even more money providing lenders like Countrywide with lines of credit to expand their risky lending and then bundling the mortgages into securities they peddled to their clients. Wall Street loved the charade because it was so profitable. Later as the market dumped, Goldman Sachs bet against the bundles — making huge profits off the losses of its own clients on the very securities it had marketed to them. Eventually, of course, everything came crashing down.

Robert Rubin, when he was the Treasury Secretary, pushed for repeal of the Depression-era act that had separated commercial from investment banking—a move that Sanford Weill, the chief executive of Travelers Group had long sought so that Travelers could merge with Citibank. Then after leaving the Treasury, Rubin became Citigroup’s vice chairman, and over the following decade pocketed more than $100,000,000 as the bank sank deeper and deeper into a risky morass of its own design.

With Rubin’s protégé Timothy F. Geithner as its head, the New York Federal Reserve Bank cut back its oversight of Wall Street operations. That same year Henry M. Paulson Jr. became the head of Goldman and was in charge when that firm created many of its most disastrous securities.

As the Treasury secretary under George W. Bush, Paulson would oversee the taxpayer bailout of Fannie Mae, Freddie Mac, Goldman, Citigroup, other banks and the giant insurer American International Group (A.I.G), on which Goldman had relied. As head of the New York Fed, and then as the Treasury secretary, Geithner would also oversee the bailout, which just to Fannie and Freddie has cost the American Taxpayer $141 Billion. ($141,000,000,000)

Today James Johnson is a rich and respected member of Washington’s political establishment (although he was forced to resign from President-elect Obama’s advisory team after the press got wind of his cut-rate personal loans from Countrywide). Franklin Raines retired from Fannie with a generous bonus. Henry Paulson became a fellow at Johns Hopkins. Robert Rubin is affiliated with the Brookings Institution. And Timothy Geithner remains Obama's Treasury secretary.

All told, it appears we have learned remarkably little from the real estate meltdown. Fannie and Freddie, are now wards of the state, currently back more than half of all new mortgages, and their executives are still pocketing fortunes. Wall Street’s biggest banks are larger today than they were when they got into trouble, and the executive pay packages are just as generous.

But the rest of us have paid dearly.

Dane Hahn is a real estate professional practicing in Florida and New Hampshire. Reach him at: http://www.danesellsflorida.com/ or at dane.hahn@gmail.com

Want To Buy a Vacation Place in Cuba?

Recently I have been thinking about “bucket list” travel and one of the places on my list is Cuba. I know I can go there now. There are lots of “shady ways” to get into the country. Whenever I bring up the subject of going there people say, “Oh, just fly up to Canada, and change planes for Havana—tell 'em you're a Canadian, that always works.”

Or others say, “If you sign up for a college class, you can take a field trip to Cuba and see lots of the country by bus”, that might work, although the bus part is not so appealing. Then there are my more adventurous friends who say, “just fly to the Bahamas and take a ferry over.”

I don't know, maybe I'm more conservative than I used to be, but I want to be able to get into the country legally on my own passport and more importantly, come back to the USA when I'm ready. I'm not looking for any surprises, and I don't want to see the inside of a Cuban prison.

But more and more the Castro Regime has begun to loosen the rules that were put in place 50+ years ago. I noted just this week that Cuba will allow her citizens and permanent residents to buy and sell real estate—starting November 10^th. Well my friends, there's a new game in town, and we call it home ownership.

This change in real estate ownership is huge. Back in the day, when Fidel Castro was a young man and he had just unseated Batista, (for you younger sprouts, this would have been in the pre-JFK years) he nationalized all the land, homes, farms and—well all the private property. What happened then is that Cuban people got to use—let's say, have the right to live in—a home that now belonged to the government. As I unbderstand it, the more the Party liked you, the better your “free home”. So for more than a half century, there has been no private ownership of homes in Cuba. But come Thursday, that will be history.

Recently, if you lived in Havana as a Citizen or permanent resident and wanted to change dwellings or move to a new locale, you couldn't go out an buy a house, you would involve yourself in a complex bartering system. As I understand it, you would be transferring your “right to occupy” your old property for another, and you may have had to pay a fee or two, and a bonus to the citizen whose “right to occupy” you were acquiring. I would like to hear from my readers who can share the Cuban real estate model with me. I would love to hear Marco Rubio discuss this topic.

Cuban officials are telling each other that this is not all that much of a move away from Socialism, but—they say--it is necessary for social and economic reform. In the real estate regulations that I read, the property ownership plan will limit an owner to two homes, (a residence and a vacation property). And all financing will have to funnel through Cuba's central bank, which will charge fees. It's not clear what fees will be due if property is purchased for cash, but there are taxes due at closing--Cuba will charge 8%, split between the buyer and the seller.

Presumably the first cycle of property sales will be deeds from the country of Cuba to the present resident/occupant, and then the resales will be between two individuals.

What would I expect next? Well I would think that Cuban-Americans will funnel free cash to family members to buy homes and vacation homes. I would expect to see some serious confusion in this market over the first few years, but as with any confusion of this type, I would guess a few people will make a lot of money.

Dane Hahn is a real estate professional practicing in Englewood, Florida and New Hampshire. Reach him at dane.hahn@gmail.com or see him on the web at http://www.dnesellsflorida.com/

We Seem to be the Only Country with an MLS

Recently around the office we've been talking about the differences between real estate business here and in other countries. For example, in Australia, there is no multiple listing service, you call the agent whose sign you see on the property and go see the house with that person. This is a huge hassle for the buyers who have to contact a number of different Realtors if they want to see what's for sale in a given area.

I noticed the same thing in Scotland a few years ago. There was a street of Realtors (although there they are called “estate agents”) and you shop for a house the way you would shop for a new suit, you go from agent to agent to see what they have, and when you find one that has something you'd like to try on, you go inside and make arrangements to go see the property.

I have noted this week that it's also just that way in Italy and also in Turkey.

And speaking of the way things are done differently in other countries, there was a story in the International edition of the Wall Street Journal that in Ireland the foreclosure rate is very low. The story went on to say that a mortgage in Ireland had more standing that in the US. In Ireland if your f you get a mortgage was foreclosed upon, whatever you owed was NOT forgiven, the bank took the house and billed you for the difference, even a bankruptcy—which in Ireland takes 5 years to execute—would not clear that debt.

So if you were unable or unwilling to make your home payments, you would lose your house and the bad credit you would incur would “dog” you for at least 5 years maybe more. In Ireland, this has resulted in people staying in homes in spite of the fact they are “underwater”. In other words, walking away from what appears to be a bad investment is not an option. I must say the Irish don't give mortgages to every Mike, Pat and Sean, so for all the people who have home mortgages, they actually qualified when they go them—and most put 20% down--that's different than here in the US too.

The other option that the Irish banks offer is a foreclosure with a rental back to the foreclosed family. The rationale is that there is no benefit to the bank to have an empty house, nor is there a benefit to the family to have to move. So they will—as I understand it—allow the family to return the deed, but stay in the house as a tenant. There was no information on how much the rent would be, but I would assume it would be less than the mortgage payment.

In Turkey, homes—and I mean nice homes--are selling in the $35,000 range along the Mediterranean Sea. The buyers are Germans and English—same as Florida. And of course the business elite and executives from Ankora and Istanbul as well. Of course the prices go up from there, but in Kusadasi $200,000 US will buy you a mansion.

Naturally in Istanbul, along the Bosphorus, homes on the water start in the million dollar range and run up to (the most expensive one sold last year) a whopping $140,000,000 US. But the cheap ones are still pretty nice, and the boats tied up out front are spectacular. So the prices vary and the laws vary, but a house is shelter and we all need at least a place to live.

That's what makes real estate (as a business) so interesting and—for me at least—so much fun.

Dane Hahn is a real estate professional practicing in NH and Florida. You can reach him at 941-681-0312. Or see him on the web at http://www.danesellsflorida.com/