Striving to create a better life for everyone by sustainably solving real estate problems

(512) 807-8777

Tag Archives: ARV

What Do Rising Home Prices Mean for Current Homeowners?

Trulia heat map

Austin is a very diverse market. Prices and trends vary tremendously by neighborhood. Even Trulia’s mapping by ZIP code doesn’t capture the details.

Current homeowners are in a much better position than are first-time buyers. If nothing else, current homeowners can continue to hold the house they’re in now and watch appreciation create wealth. But for many of these people, appreciation is a double-edged sword. Yes, it increases the value of their home, but it also increases the property taxes they have to pay each year.

Current homeowners are also more likely to be in the upper half of the income distribution. That means they can afford a higher payment and the ever-increasing tax burden, which could increase their monthly payment every year. [As a side note: don’t think you avoid property taxes by renting. You still pay your landlord’s property taxes; you just don’t get to deduct them.]

Finally, current homeowners can roll the equity in their homes (garnered through payment and appreciation) into their next home purchase. If they need (or want) a bigger home or one in a more expensive neighborhood, that equity helps them keep their monthly costs down by providing a larger down payment.

Continue reading →

Hermann says please like and share!
0Shares

Are Austin Area Home Prices Starting To Plateau?

ABOR Median Home Prices continue to rise

This graph shows the median home price in the greater Austin metroplex as of December 2004-2016. The 2017 data is for January, which is the latest available at this writing. Future prices are guesses based on the average year-over year change.
Source: Austin Board of Realtors®

In October, I published an earlier edition of the infographic shown to the right. It lists the median price of houses in the Austin market at the end of the year from 2004 through 2016. That article focused on the dangers of trying to time the market. Although real estate prices generally rise over time, that price growth is never a straight line. Like all markets, there are ups and downs along the way.

Definition
Median Price is a statistical measurement that is useful in identifying and tracking trends. The median price is the price at which the number of houses selling above that point is equal to the number of houses selling below that point. Median price is usually a more stable number that average price, which can show wild swings due to extreme outliers—extremely high or low priced sales.

Today I added December 2016 and January 2017. This post was inspired buy the drop of just over $10,000 between December 2016 and January 2017. What could that mean? Are home prices in the Austin area starting to stabilize or maybe even fall?

It’s impossible to say from just one month’s performance. Housing sales always slow over the winter. This slowdown results from a number of factors, including the holiday season and bad weather (although bad weather is the best time to look at a house). These factors form the “seasonal differences” you hear so much about.

There are other factors at play, too. Inventory (the number of houses available to sell) in the Austin area remains extremely low. The February inventory held only a two month supply. In contrast, a stable market usually has about a six month supply. The inventory alone will ensure prices don’t go down to far and will probably keep pushing them upward.

Then there’s the national debt. The national debt lowers the value of money, which causes the price of everything to rise. General inflation bleeds into the housing market, too. Higher prices create higher prices.

And look at the trend line in that graphic. During the Great Recession, the trend line went up, even when we experienced a temporary drop in housing prices. And now, even with the drop between December and January, prices continue to increase apace.  I projected that trend into the future by adding the 10-year average year-over-year change in price to SWAG future prices.

It looks like homes will only get more expensive as time goes on.

Next time, I’ll talk about what I think that means for individual homeowners.

Hermann says please like and share!
5Shares

How to Manage Your Repairs

Kitchen with bad cabinets and backsplash. Lots of garbage.

How much would it cost to fix this kitchen? It depends on the level to which you want to renovate it. You should make the decision, not your contractor.

Estimating the cost of repairs is one of the most difficult parts of this business. You just have to learn this part of the business yourself if you want to redevelop houses.

There are systems available to help with estimating repairs, but your contractor is probably the most unreliable one. Here are a few reasons why you shouldn’t rely on your contractor for your repair estimate.

  • It’s not your contractor’s money; it’s yours.
    My experience with contractors tells me they are very good at fixing things, but they are not necessarily good at running a business. They rely on cash flow—specifically your cash flow—and seldom plan more than one job ahead of today. (As Suna mentioned the other day, we’ve even had one contractor go homeless in the middle of a project and squat in our renovation.) And they have a responsibility to their families and employees that trumps their responsibility to you. That said, as a rule, contractors want to do a good job and see themselves as hardworking, honest people.
  • They really want the work and know you want to save money where possible.
    This situation leads to two conflicts of interest.
    • They may underbid the project to get the work.
      I recently had a contractor submit a very low bid for a job. When I went over the statement of work with him, he had left more than half of the items out of the bid. It may have been a simple oversight, but he may have intended to charge a fee per “change order” to get the rest of the work done, too.
    • They may assume you want to use the cheapest materials and methods available.
      Contractors, even the ones who claim to specialize in “high-end renovations,” will cut corners on methods and materials when they can. You have to know what you need and what you’re paying for. Then you have to make sure you still make money at the end of the project. Saving a nickel on cheaper materials can cost you a dollar in resale value. Just remember that the opposite is not necessarily true. It’s very easy to over improve if you don’t know the market.

Solution

Spreadsheet showing work to be done.

The more detailed your statement of work, the better of you are. The model numbers of the doors are not specified here because they had already been purchased but not used on another project.

It takes time to learn to do a valid repair estimate. But what will save your bacon is to have a detailed scope of work (SoW) for the project. It should list every task you want to have done as a separate line item:

  • Paint the exterior walls and soffits Muslin (SW6031)
  • Paint the exterior facia and window trim Craft Paper (SW6125)
  • Replace the front door with a JELD-WEN 34 in. x 80 in. Craftsman 6-Lite Painted Premium Steel Prehung Front Door with Brickmould (Home Depot Model #THDJW182500036, Internet #204317376)

Notice that I provided paint codes and model numbers. There can be no room for confusion when you are this detailed, and you should provide this level of detail for everything you want done. If you do, you’re in charge of your project, not your contractor.

As you go through the project, you know when each line item is done and ready for payment. You also know if your contractor substituted materials or changed pricing without your approval.

But there are times when the bid is an estimate, and you have to recognize those times and be somewhat flexible. For example, we’re having custom cabinets built for one of our projects. My contractor gave me an “updated” SoW to reflect the pricing he got from the cabinet maker. That pricing came in at almost double the GC’s bid, and he had “helpfully” changed the bid price to reflect the sub’s bid. We had a long discussion about helping. We decided to use custom cabinetry only in the kitchen and master bath and to use prefab cabinetry of a similar design from Lowe’s in the other rooms. We are still over budget (I kept the original numbers so we could track the actual overage), but we are much closer to the original bid than we would have been putting custom cabinets throughout the project. More importantly, I know how much and why we are over budget, because I didn’t use the “helpful” updated numbers.

Isn’t it funny? He didn’t think it would be helpful to change the original bid in places where he actually came in under budget.

Hermann says please like and share!
9Shares

Inflated ARV: Market Timing

Bar graph showing an upward trend in home prices.

It’s much easier to predict market cycles in real estate than in the stock market (where many would say it’s impossible), but you can still lose your shirt by assuming the market will always go up.
Source: Austin Board of Realtors®

One of the easiest mistakes to make in renovating houses is to overestimate their After Repair Value (ARV). In this post, I’m not going to delve into motivations for inflating a house’s ARV. After all, I’ve done it to myself, so far be it for me to cast asparagus on anyone. I’m just going to talk about how it happens, and there are only a few ways:

  • Use the wrong comps.
  • Make the numbers fit the model.
  • Mis-time the market.

I originally planned to talk about all three of these risks in one post, but I soon figured out it would be way too long. Click here to open all posts on this topic.

Mistime the Market

In the stock market, they say the fastest way to go broke is to try to “time the market”—that is to buy when the market is lowest and sell when it is highest. Real estate markets move much more slowly, and we have leading and trailing economic indicators to help us time the market. Some things to consider are:

  • Special uses
  • Seasonal differences
  • Renovation time
  • Market cycle
Special Uses

Special use properties make it easy to misjudge their value.

Farm land is cheaper in bulk; buying by the acre gets expensive. But farm or ranch land doesn’t produce any income unless you actively work it, and—while it does appreciate over time—you can be looking at decades to see significant improvement.

Offices, industrial space, and recreational properties exaggerate swings in the local business cycles. You must have a really good finger on the local economy’s pulse to play in this park—or need the office space yourself. It also costs more to get into this game than standard housing. That said, there is plenty of money to be made if you find a property where the use is about to change—like along the perimeter of where a new Box Store is going in.

Seasonal Differences

Housing in general sells better in the spring and summer, but resort housing exhibits this behavior on steroids. Many fewer buyers even think about buying a lake house when it’s too cold to get in the water or a house on a golf course when the greens turn white with snow.

We also know that water frontage adds considerable value. But what happens when a drought sucks the lake’s shoreline a quarter mile out? During the last drought, the receding shoreline exposed everything from illegal sewer lines to missing persons still sitting in their rusting cars.

Renovation Time

This is a big one—and one that has bitten every investor I know. You expect a project to take 90 days, but it actually takes six months. Maybe you find unexpected conditions. Maybe it takes longer than anticipated to get permits. Maybe you contractor flakes out.

At a minimum, that means you have additional holding costs for each of those three months, and that can really add up on a big project. At worst, it means you may miss the selling season or even hold a property into a down cycle.

Market Cycle

Given time, real estate will probably appreciate. But never assume appreciation in your purchase decision. If you do, you may wind up holding the property for decades or centuries to recoup your investment. Just look at the Rust Belt or Detroit.

The rule of thumb in Austin is that we have a five year cycle. The market goes up for three years and slumps for two. But the market is unpredictable. As my friend Shenoah Grove likes to point out, “We are now six years into our five-year cycle.” While this prolonged up-cycle is being driven by bigger economic trends—growing population, strong economy, oil boom (yes, the price per barrel is down because we have so much production right now.)—the likelihood of an adjustment makes longer renovation project much more risky.

Given the human trend to assume an up market will last forever, I’d be extra careful about every buying decision.

Hermann says please like and share!
7Shares

Inflated ARV: Massaging the Numbers

ARV Questions

When calculating ARV, you have to think like a buyer, a contractor, an appraiser, a seller, and an investor…all at the same time. Any question you can ask yourself is probably important.

One of the easiest mistakes to make in renovating houses is to overestimate their After Repair Value (ARV). In this post, I’m not going to delve into motivations for inflating a house’s ARV. After all, I’ve done it to myself, so far be it for me to cast asparagus on anyone. I’m just going to talk about how it happens, and there are only a few ways:

  • Use the wrong comps.
  • Make the numbers fit the model.
  • Mis-time the market.

I originally planned to talk about all three of these risks in one post, but I soon figured out it would be way too long. Click here to open all posts on this topic.

Make the Numbers Fit the Model

As I mentioned before, wholesalers know our requirements, so it’s easy for them to (intentionally or not) make the numbers fit that model. Most wholesalers understand that their long-term survival depends on their reputation, but there are exceptions to every rule. Rely on your own or a third party for your numbers.

You also have to honest with yourself. We’ve all seen (and some of us have been) someone who says, “My house has to be worth $200,000,” with the implication being “because I need it to be worth $200,000.” Buyers don’t care, and they are the ones who make the final decision about how much a house is worth. If every other house like yours is selling for less than $150,000, nobody will pay $200,000 just because you need that much.

It’s very easy to convince yourself to pay more than you should. “I can pay another $10,000. If I fix it up to be the nicest house in the neighborhood, I should be able to get $20,000 more than those other houses have sold for.” Wrong. You may be able to push the market a little. You may even find a buyer who is willing to pay that $20,000 above market, but, unless the buyer is paying cash, the house still has to appraise. And appraisers work for the bank, not you. They aren’t going to ignore the comps just because you and the buyer agree on a higher price.

Suggestions

Scale

There are are many ways to tip the scale in favor of something you want to do. Be honest with yourself and let the numbers make your decision.

Here’s how to avoid these traps:

  • Always run your own comps and trust your formulas. Never take the word of a wholesaler, especially when you haven’t done business with them before. Be conservative with your estimates of ARC and overestimate the repair costs. It’s much better to come in under budget and sell the house for more than the inverse.
  • Keep your emotions out of it. Whether you are buying, selling, or renovating, your emotions will lead you astray. If you have to, keep a disinterested professional on your team to give you value advice in each stage of the project.
  • When selling, it’s okay to be near the top of the market, but don’t try to push the market higher. Price your house just below the top, and let buyers push the price higher if they want to compete for it. Depending on your project, it can cost considerably less to discount a house than to hold it for even a couple of extra months.
Hermann says please like and share!
7Shares