When bank compete........
Lending Tree is a large Internet lender who has a television ad campaign that talks about banks competing for a customer’s mortgage business. One of the lines in the commercial is “When banks compete… you win.” Well, that probably depends upon your perspective. What if a number of banks were in competition with individual homeowners trying to sell their properties? Do sellers win? How does that affect the market value and equity of other neighborhood property owners?
Sandra is an attorney in San Jose who I helped purchase an investment property in a nice new development in Rancho Cordova in 2005. Her intent was to rent the property for two years and then sell for a profit. Last week her tenant called to say he was leaving at the end of his 2-year lease. Sandra then called me to ask about selling the property. As with many other clients this year, I counseled Sandra not to sell her property. As Kenny Rogers said, “You need to know when to hold ‘em and know when to fold ‘em” and this wasn’t the year to fold ‘em. Sandra understood the market but did not want a negative cash flow from her rental. She could off-set the capital loss on her sale by some other capital gain she had on another property she sold earlier this year. I still encouraged her to hold off on selling but promised to check out her local neighborhood values and calculate her loss after selling costs. Maybe she could break even.
After checking on the neighborhood listings and sales I was more convinced that Sandra should postpone the sale of the rental. Sandra purchased the new home at the top of the market in July of 2005 and her neighborhood values have been declining since. The local builder, in a close-out special in 2006, lowered his prices on the same model home, dropping Sandra’s value $25,000 and the only recent sales and listings were short-sales and a bank repo dropping her value even further. The property history on the short sales and bank foreclosures revealed that the banks were competing with each other. Each time one lender would lower their listing price the others would follow. “When banks compete……
My job was to show Sandra some alternatives to selling her property at this time. She could not afford to compete with financial institutions that were currently influencing the southward direction of the market. The first thing I did was to analyze the sale of the property. After deductions for all selling expenses and the cost of a vacancy while the property was for sale, she would lose $50,000. That would be a firm loss with no chance of recovery.
Next we calculated her yearly loss on the property. When she purchased, she put 20 percent downpayment but the negative difference between her mortgage, taxes, insurance and property expense and the market rent would still be $500 a month. As a rental with a negative cash flow, Sandra would receive some relief in the form of deductions from her other income and Sandra could afford to take the $500 a month hit with some adjustments to her 401K contribution. The question was for how long? We looked at a five-year scenario.
According to the California Association of Realtors, since 1982, the year over year price of a single family detached home in Northern California has declined in only 5 of the last twenty-five years. The most severe decline of property values was in 1991 with a 6.1 percent drop from the previous year. By contrast, twenty years have shown increases. The highest year-over year increase was in 1990 with a 25 percent jump in property values, followed by a 24 percent bump in 2004. The median price of a home since 1982 has increased 367 percent for an average of 14 percent a year. Although past performance doesn’t guarantee future results, it’s likely that property values will appreciate in the future by a minimum yearly average of 5 percent. That’s what we used to calculate a future sale.
Based upon no rental increases in the next 5 years and no vacancies, Sandra was scheduled to put $30,000 into her property. Then we figured, with a 5 percent compounded appreciation rate, what her property would be worth in five years. After subtracting her mortgage and selling expenses her profit would be $50,000 after returning her initial downpayment and the $30,000 that she invested over the five-year period. By using historical averages, conservative economic projections and know costs, we were able to calculate the return on Sandra’s investment.
Too often we make emotional decisions based upon short-term pain or gain. Real estate as an investment is subject to the current market fluctuation but consistent long-term appreciation.
Sandra is an attorney in San Jose who I helped purchase an investment property in a nice new development in Rancho Cordova in 2005. Her intent was to rent the property for two years and then sell for a profit. Last week her tenant called to say he was leaving at the end of his 2-year lease. Sandra then called me to ask about selling the property. As with many other clients this year, I counseled Sandra not to sell her property. As Kenny Rogers said, “You need to know when to hold ‘em and know when to fold ‘em” and this wasn’t the year to fold ‘em. Sandra understood the market but did not want a negative cash flow from her rental. She could off-set the capital loss on her sale by some other capital gain she had on another property she sold earlier this year. I still encouraged her to hold off on selling but promised to check out her local neighborhood values and calculate her loss after selling costs. Maybe she could break even.
After checking on the neighborhood listings and sales I was more convinced that Sandra should postpone the sale of the rental. Sandra purchased the new home at the top of the market in July of 2005 and her neighborhood values have been declining since. The local builder, in a close-out special in 2006, lowered his prices on the same model home, dropping Sandra’s value $25,000 and the only recent sales and listings were short-sales and a bank repo dropping her value even further. The property history on the short sales and bank foreclosures revealed that the banks were competing with each other. Each time one lender would lower their listing price the others would follow. “When banks compete……
My job was to show Sandra some alternatives to selling her property at this time. She could not afford to compete with financial institutions that were currently influencing the southward direction of the market. The first thing I did was to analyze the sale of the property. After deductions for all selling expenses and the cost of a vacancy while the property was for sale, she would lose $50,000. That would be a firm loss with no chance of recovery.
Next we calculated her yearly loss on the property. When she purchased, she put 20 percent downpayment but the negative difference between her mortgage, taxes, insurance and property expense and the market rent would still be $500 a month. As a rental with a negative cash flow, Sandra would receive some relief in the form of deductions from her other income and Sandra could afford to take the $500 a month hit with some adjustments to her 401K contribution. The question was for how long? We looked at a five-year scenario.
According to the California Association of Realtors, since 1982, the year over year price of a single family detached home in Northern California has declined in only 5 of the last twenty-five years. The most severe decline of property values was in 1991 with a 6.1 percent drop from the previous year. By contrast, twenty years have shown increases. The highest year-over year increase was in 1990 with a 25 percent jump in property values, followed by a 24 percent bump in 2004. The median price of a home since 1982 has increased 367 percent for an average of 14 percent a year. Although past performance doesn’t guarantee future results, it’s likely that property values will appreciate in the future by a minimum yearly average of 5 percent. That’s what we used to calculate a future sale.
Based upon no rental increases in the next 5 years and no vacancies, Sandra was scheduled to put $30,000 into her property. Then we figured, with a 5 percent compounded appreciation rate, what her property would be worth in five years. After subtracting her mortgage and selling expenses her profit would be $50,000 after returning her initial downpayment and the $30,000 that she invested over the five-year period. By using historical averages, conservative economic projections and know costs, we were able to calculate the return on Sandra’s investment.
Too often we make emotional decisions based upon short-term pain or gain. Real estate as an investment is subject to the current market fluctuation but consistent long-term appreciation.
posted by Ken Calhoon at 7:33 AM
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