The Lion's Den

As a property management company owner and investor, I have been contemplating the effect of the sales tax effort on the property management industry and as a investor as well. Did it work? Based on some of the preliminary data, it definitely picked up interest for new home buyers.  However, I am not sure if it created a resurgence in the real estate market, or it simply front loaded majority of the the sales for the year to happen before April 30th, 2010.

However, the fact is that this economic recovery seems to be a depressing recovery. Statistics indicate that job figures are growing and home sales are up., but it is difficult to see people dancing in the streets during these times over those figures. In fact, home sales are also up over the year. However, when the government tax credit is not in place will those buyers be flooding the market? Did the tax credit really enlarge the pool of buyers entering the market or did it just speed up the decision to buy for the pool of buyers?  Did you really decide to buy a home because you could get eight thousand dollar tax credit? I doubt if your job situation was not secure, your credit scores solid, and you had the down payment capital that you just ran out and bought a home. The person who was taking advantage had to answer “Yes” to those three factors that I mentioned before they went out and bought a new home.

The reason that I think that this a depressing recovery is based on other indicators. For example,  AP News reported that a flood of foreclosures are expected to hit the market over the 2nd half of the year. Many banks had stalled on foreclosing on individuals due to loan modification programs instituted by the government.  Now, those foreclosures will flood the market due to individuals not qualifying for  mortgage modification.   The AP reported that these foreclosures will be from lower priced properties. Therefore, if there is a economic recovery, it has not completely trickled down to the blue collar and service sectors of the economy, as they continue to lose their real estate investments and homes.

For people like real estate investors and other homeowners, the 2nd half the year maybe a better time to buy. You may not get a huge tax credit, but if a property is 10 to 15k lower due to the market conditions, then it may have been wise to wait. There are no guarantees for investors or home buyers that the homes that flood the market will be in locations or conditions that they want to deal with.  The point is that even when a golden opportunity to participate in the market may have passed that we should not view that the buying potential for real estate is completely shut down. In fact, for those who have been able to stabilize their job situation as part of the recovery; then the 2nd half of the year could be a excellent time to buy.

When I was a young investor, I did not fully appreciate why tradesmen from established companies were so expensive.   However, as we have been maturing as a firm and a investor, it is becoming clear why tradesmen and companies have to build in those cost.   I wanted to review what are the components that force professional firms in the various trades to have higher cost.

First, smaller tradesmen are often not insured with liability insurance.  If  they cause any kind of damage to person or property, then they cannot reimburse those cost if they exceed their readily available funds. This insurance is charged based on payroll and revenue, and for small firms, this can often equal a hefty fee for example. For a company that bills $180, 000 in labor cost, then this charge can equal at least $5000 or more. This is over 5% of their revenues. 

Second, larger firms often carry additional insurances like nonowned auto policies and workmen’s compensation that are often very expensive.  A nonowned auto policy covers the risk that a worker while driving to a project gets in a car accident while enroute to the location. Due to liability laws, the company can also be found liable in these types of accidents.  Another expensive insurance for professional firms is their workmen’s compensation policy.  This policy is designed to cover the risk that a employee is injured on a job site.  If a worker is injured at the job site, then they could seek to sue the owner of a property as well as their employer.   A workmen’s compensation policy aims to protect parties in these types of claims.   All of these additional insurances can be costly with quotes with thousands of dollars for each of these policies. You could be spending over 10 to 15% of your revenues in insurance claims.

Third,the smaller tradesmen usually cannot provide you a emailed estimates and strong accounting of funds. These smaller companies are often paying money as they are going.  There are issue when you are doing a project that involves several smaller projects. Owners who hire the less sophisticated contractors are hoping that they will remember what they were paying for, but these owners will forget what the funds were being applied to.  This requires firms to retain quality bookkeepers and staff to insure that invoicing, payables management, and other items are being handled in a appropriate manner. If a contractor fails to pay material providers, then those material providers can often seek recourse and put liens against homeowners or investment properties.  This could cost additional overhead cost that employers must recoup when they bill out their clients.  Even if you take a clerk position to cost just $15 a hour, then you could have additional $28,000 or so a year to your bottom line (not including payroll cost or benefits).

Fourth, payroll taxes that are charged to employers by both the state and federal government add approximately 12% to the cost of a employees base salary. 

Fifth, any kind of benefits offered to employees will often cost the employer even more money.  This means that offering health care benefits, retirement plan options, etc. would only drive up the cost of the employment.  As was noted in a recent article by Forbes, a $15 person really cost around $25 due to the cost of benefits and payroll taxes.
This is why many firms who provide professional services have to charge $45 to $55 a hour per guy to even create a profit margin that make it financially viable to run a top tier firm (note this could be on the lower end as skilled trades people will cost more then $15 a hour, as my example is based on).   If you add in additional cost for firms that have to provide licensed professional (the labor tends to be more expensive), then you can see how licensed trademen can cost even more then that per hour.  This is why plumbers, HVAC, and electricians are costly from larger, reputable firms. 

As a real estate owner, you must remember that there is a price for quality, but there is also a price for all the other elements of a reputable firm as well (insurance, overhead, and payroll taxes).   You may save money by using a smaller operation, but you are picking up exposure that you must be prepared to handle.  This is a concept that s insurance analyst call ”self insuring”  for all the risk that are noted above.  When you save money, you definitely feel like a winner; but when one of the risk noted occurs, you feel like you were 2nd place in a 2 person race.

(Jay Raman is a real estate investor, and he is the owner of a full service real estate property management firm, Ashoka Lion- www.AshokaLion.com. You can send emails to him through the “Contact Us” portion of the site)

There was a article about Warren Buffett’s investing tips that he outlined in his yearly letter to investors. However, the rules that he outlined are just as applicable to real estate investing as a industry. I will outline his rules for investing, and I will explain how I believe that they relate to real estate.

Rule #1: Never Lose Money Rule #2: Remember Rule #1.

Warren Buffett’s rule was not meant to be a glib comment. In fact the article on Yahoo, explained how even Mr. Buffett lost $23 billion. However, his point is that you cannot gamble on gains. To often investor’s enter real estate investing, betting on huge gains without doing their own due diligence. I have met many investors who buy property based on glitzy presentation made by builder groups or they buy property sight unseen. This seems to define the concept of “gambling”.

Another corollary formula is that a if a business does well, a stock will eventually follow” . In real estate, this rule could be applied as well. If you choose properties that do not have a solid investment rationale, then it will likely fail. Real estate investors should evaluate the reasons that they believe that the property is a good investment. Is it in a good location? Is it the crime rate rising? Are there many foreclosures? Are property values falling?

Another corollary is “It is far better to invest in a wonderful property at a fair price than a fair company at a wonderful price.” I have seen many investors not evaluate the price of a property and why it was priced in such a manner. If a property is priced below market prices, then there is a definite reason. In today’s market with the ease of internet access, pricing arbitrage opportunities are less prevalent. Therefore, the price should reflect some reality of the property. Does it have major repairs to be done? Are there unpaid lien risks?

The final corollary is “Our favorite holding is forever.” This rule is very applicable to real estate investing. It is extremely risky to invest in a property without a long term view. Too many investors believe that the should take a immediate “flip this house” view point, but without the right due diligence and team in place; these goals may often devolve into “rent this house”. If you are flush with cash, then you can hold a property and wait for the property to sell. However, many investors do not have this reserve of cash. This forces them to prematurely abort their “flip this house” plans, and try to scramble to obtain cash flow. If you cannot support your investment decision by holding the property for a extended period of time, then you may want to reconsider your investment strategy.

Warren Buffett’s rules for investing work for both real estate and stocks. It is not shock that he is the richest man in the world with these kinds of sound investment rules.

(Jay Raman is a real estate investor, and he is the owner of a full service real estate property management firm, Ashoka Lion- www.AshokaLion.com. You can send emails to him through the “Contact Us” portion of the site)

Currently Homeowner Associations, Condo Associations, and Townhome Associations are also battling the pain of the economic downturn. Homeowners are dealing with the pain of not being able to pay their bills due to unemployment or underemployment, but this is also trickles down to Associations that these homeowners are members. 

When people fail to pay their dues, then it puts the Association’s finances in jeopardy. Associations pay for commmon area maintenance (pool, pest control, or lawn maintenance), common area utilities (outside lighting, etc), or security measures.  All of these matters are considered to be critical to the perception of a community. If those issues deteriorate, property values will continue to fall, which will hurt the investor’s or other homeowners who are seeking to protect or increase the value of their investments.

Many homeowners fail to realize that the basic functions of a homeowners association are designed to preserve property value and protect the community. There are horror stories of Associations who are overzealous, but the few horror stories should not overstate the value of the Association.

We have seen investment properties that were located in communities without a HOA completely deteriorate into condemnation. The lack of Association made it difficult to coordinate waste services for the community, common area lighting, lawn maintenance,etc. This erosion of basic services continued to drop the property value. The properties were originally purchased by many investors and homeowners at $145,000 a four-plex.  Today, those complexes are being sold for $15,000 to $25,000 a four-plex and many of the issues could have been quelled if there were a mechanism in place to facilitate communication between owners. Many of the homeowners let the investments go to foreclosure in the end or short sold the units.  Investors should not completely shun the idea of purchasing properties in communities with a association in place. In many instances, the association can at least assist in maintaining community appearance. The community factors are outside of a investor’s control, but they have a equally devastating effect on the property perception and value. In many cases, the community perception can overwhelm any positive features that a unit may have for potential tenants.

Associations will have to evaluate all levels of the operation to determine if they can remain lean in these difficult times. This could include reviewing vendor contracts, scaling back services, and evaluating any revenue generation options that are open to the community.

Hopefully, the economy will turn around,  and homeowners will not be forced to face the choice of paying the association bills or paying the light bill.  Till then end, remember that your Association may be one of the few mechanisms to protect your property values that you have as a homeowner or investor.

(Jay Raman is the owner of a full service real estate firm, Ashoka Lion www.AshokaLion.com that provides Association Management services. You can send emails to him through the “Contact Us” portion of the site)

It is so difficult to sort through the mixed news that we have about the industry. First, there are reports that sales have increased, and the rate of foreclosures are decreasing. However, we have reports that now we are facing a new crisis that could be affecting commercial real estate.

Now, the government has extended the tax credit, and the Fed is keeping the prime rate low, which should be good for buyers.  With all these mixed signal, you have to be a fortune teller to make sense of all these signs.

In my humble opinion, there will be opportunities; but they will have to sifted through. The easy deals of the past are not easy to find.  To me the great investors are the ones that have easy access to capital, but even more important then the capital will be their access to the teams to help them capitalize on these “diamond” in the rough properties.

Many of these properties will be turnaround situations, which will require competent management teams, realtors, contractors, handy men,etc. to truly make those situations profitable. There is a reason that a property is selling for below market prices, and sometimes investors over look this fact. People need to quit believing that money is risk free easy money.

Obviously, there are good deals with the number of deals in the market. The key to a deal is execution once the property has been targeted. This requires good people to get a property ready to either sell or lease, as well as the right teams to help you market your properties once they are ready. 

Many investors often underestimate or downgrade on the importance of these professionals who provide these services, but the fact is that without those quality individuals helping that a property investor will fail miserably to execute their flip or lease strategies.  

Another key issue is not determining quality just on the basis of price. As the axiom goes, “you get what you pay for”. Vendors or professionals who do not base service on price alone should be discounted. The value cannot be only measured by the short term outlay, but it should be evaluated in the context of the bigger picture.

Next year will be a great year, but only for those people ready to build teams to take advantage of these conditions. It is very difficult for owner’s to understand that you should not always be a jack of all trades, but a master of none.

(Jay Raman is a real estate investor and he is the owner of a full service real estate firm, Ashoka Lion www.AshokaLion.com. You can send emails to him through the “Contact Us” portion of the site)

I have been reading some various economic indicator that indicate mixed signals. Officially, our economic output as measured by GDP grew, but we also experienced around a 4% decrease in new home sales as well. With all of these mixed economic indicators, it is very difficult to feel like celebrating that economist say that we are turning around from the recession.

What are the drivers of this growth? Why do I see news clips stating that Shells plans to cut 10% of its workforce, and the market took a beating after rallying quiet bit.  When the economy recovered from other recessions or dips, it was easy to see where money was flowing.  Housing is flat. Technology is flat. Banking has tight lending so well capitalized small business owners are not a reality in this day and age.

Without the clear indicator of these growth engines, it is very difficult to feel enthusiastic. Maybe the growth is from the health care industry, since more people probably got ill just looking at the job prospects. Also, if the health care spending is increasing, then is this not the issue that people point to is a cancer to the other industries in America? Why should anyone outside of healthcare people be happy that more money is pouring into that industry? I thought the whole point of health care reform is that health care consumes too many dollars of the US economy. Therefore, this is not the bandwagon to cheer about, while Congress is debating to reform many of the items leading to the explosive pouring of money.

At this point, I really do not feel comfortable that the growth is based off a sustainable model. The commercial industry is supposed to be the next wave of foreclosures due to all the empty office and commercial spaces. Where is the growth coming from?

If it the stimulus plan, then conservatives are going to blast that kind of growth as “Communist”.   Also, since this spending is based on deficit spending, this could be injurious to the long term health of our economy with inflationary risk.

I am not pundit on television or a pure economist, but I feel like I am a educated person trying to put my fingers around this data.  It just feels like we are standing still. Maybe with all the bad news that people get, then this is reason to celebrate?

(Jay Raman is a real estate investor and he is the owner of a full service real estate firm, Ashoka Lion www.AshokaLion.com. You can send emails to him through the “Contact Us” portion of the site)

I know it has been a while since I posted on the site, but it has been a hectic time in my personal life. However, I am definitely going to make a more pronounced effort to keep my viewers more informed about my random insights of real estate (now that may not be worth much, but I gotta keep my audience entertained!).

Normally, I am more grim about the market, but I have been a helping a few new home buyers find homes which has me seeing a really positive trend in this mark that for them it is a good market. As investors and speculators continue to be shut out of the market (except for those who are in solid cash position or ready lines of credit), this market really could be a solid market for newbies.

Everyone has heard about the tax credit, but it is worth mentioning again. If you are a first time homebuyer, you can get a $8,000 tax credit if you close before November 30th. This would be a nice chunk of change to get on your tax returns. Couple these incentives with a article that I read in the Chronicle from Nancy Sarnoff at (www.Chron.com) that 1 out of 4 sellers in the United States have slashed prices. This means that prices are either decreasing or stabilizing right now, and this could be a nice entry point for homebuyers. These are two particularly strong force that are converging together at this time.

Now, my wife and I are refinancing our home, and I can see the final part of this perfect storm- interest rates. Rates are low for first time home buyers and primary home mortgages (investors- not such a good time), as rates are around 5% in many banks. This means if you can afford a payment that you will enjoy great payment terms. I do strongly urge that people make sure that they understand their payment terms on any loan. You should consider 15 year, 20 year, 30 year mortgages that are fixed as most people are easily able to understand what they are getting into. Now, I know that there are investors or savy investors who can take advantage of Adjustable Rate Mortgages, etc; but I am not one of those people. I stick to easy to understand programs to avoid issues later on that I will regret.

Now, lets review: 1st Tax Credit for First time homebuyers, 2nd Prices are falling, 3rd Low interest rates. Maybe, there can be a silver lining through this real estate downturn for some people. As they say after a storm, there is always a rainbow. The end of this rainbow is not a pot of gold, but a 2000 square foot home with 3 bedroom and 2 baths for lucky people.

(Jay Raman is a real estate investor and he is the owner of a full service real estate firm, Ashoka Lion www.AshokaLion.com. You can send emails to him through the “Contact Us” portion of the site)

I was reviewing a article that said new homes sales are down 33%. The interesting thing is that as bad as those figures sound that I am actually shocked that the numbers are not lower. In prior years, credit was easily accessible. Today, instead of focusing on the negative news, I will change roles and analyze it from the cup half full perspective.

If banks are not lending in this credit crisis, and people are losing their jobs; then who are buying all these homes? Our natural inclination in these times is to assume that the economy has ground to a halt, but I think that this helps put in perspective that even in the most dire economic straits that the US economy still keeps running.

66% of home purchase could not have been bought by investors, so this indicates that even in these bleak hours some people are finding great deal. They must have tucked some serious cash under their mattresses, but it worked for them didn’t it? As many realtors and real estate experts say, this is a time to buy for those fortunate enough to be in a position to do this.

We are in the longest recession since WWII, and yet our real estate industry has only been knocked down 33%. I was not alive in WWII or a historical economist, but from what I learned in class; WWII nearly brought the US to a stand still. This means if this is the worst that we are facing, then this country will survive. As they say, “This too shall pass.”

(Jay Raman is a real estate investor and he is the owner of a full service real estate property management firm, Ashoka Lion www.AshokaLion.com. You can send emails to him through the “Contact Us” portion of the site)

The Houston Chronicle did a story about appraisals are killing home sales, but I wonder why it is such a bad thing?

Appraisers are now appraising below agreed upon sales based on their analysis.  Brokers are stating that they have multiple offers coming in at a price, and this should justify the appraisal. However, the appraisal process is not driven by potential deals, but instead  they are evaluated by recently closed ones.

When appraisals are being targeted based on potential deals, there is less accuracy. It cannot be evaluated whether those person would qualify for the price that they are offering,etc.

Construction cost or comparable sales are better indicators of historical value. This is what banks are looking for to make hard decisions.  Prices were over inflated over the past decade due to easy credit and sales persons pushing up values. When a properties value is not in line with cash flow analysis for rentals there are deeper issues to consider. Does a property whose cash flows exceed rental values have factors that make it only valuable to home owners and not as a investment?  Is there  a historical basis to the property? Is there a sentimental basis for the high valuation?

If there is not a reason for the excessive values, then why does the property value get to go higher? In Texas, we have so much land that people keep moving further out.  This means that buyers can find a substitute value, and this hurts reselling homes in suburban areas.  Only a paradigm shift caused by high fuel values or similar kind of similar factor will cause this substitute to remain unattractive. 

Until more buyers value, “green homes” or lower commute time or fuel cost; then you will continually have issues.  People could argue that the offers prove that the home is valued at the offer, however there is no evidence provided that those offers are made by savy person with a full range of information. To truly accept that the market place is working correctly, the buyer and seller have to have a free flow of information. What if the agent did not do any research on comparable market values? Is this offer really a good offer?

People are going to suffer in this real estate environment, but as I have noted before; we have to take our medicine to get better for the long run. If the appraisers are doing their job based on unbiased information, then why should we fault them? We were mad when they did not do it, so lets applaud unbiased analysis.

(Jay Raman is a real estate investor and he is the owner of a full service real estate property management firm, Ashoka Lion- www.AshokaLion.com. You can send emails to him through the “Contact Us” portion of the site)

My property management firm (www.AshokaLion.com)  often  finds investors ill prepared to understand the risk of owning real estate.  One of the most difficult concept that owners struggle with is that properties maintenance is expensive . 

The price of a property is directly related to a few key factors: 1) Location 2) Appeal of home 3) Maintenance issues.   When you find a great deal in this market, the reasons often relate to one of these factors. For example, if your home has a lot of deferred maintenance issues; then seller may have to discount the price for these repairs. If a investor finds a “cheap” deal, there is often a reason for this.  This is why investors have to understand the risk involved with buying real estate. My remodeling team often come across many investors who fail to appreciate this risk prior to buying property. Tradesmen (electrician, plumbers, HVAC, carpenters) are not cheap. You may find vendors who will promise low prices, but you could compromise quality or reliability for false promises.   Desperate investors lose sight of that age old adage “You get what you paid for”, when they get properties with extensive repair needs. 

Trustworthy vendors and quality work are done by true professionals. This means that you may not always base these decisions on the cheapest bid. Investors should do their due dilligence with vendors. Do they have insurance? Are they licensed? Do they conduct themselves in a professional manner?  Do they seem knowledgable in the work that you are requesting?

It is great to get a property cheap, but you must be prepared. First, estimates do not always come cheap. You may get a vendor to come to provide a bid for free, but they will not come repeatedly if they are not getting the work.  Second, you should let the vendors bid for projects without knowing the other projects. Contractors may accept a bid lower then normal just to get the project. However, cost could “unexpectedly” increase or they may not provide you their full attention because the margins are too low on the project. There are many horror stories of vendors who leave a job midway to take a better paying project.

Ownership of investment property is a great thing, but owners must strive to understand the business of real estate. Nothing is free.  Proper perspective will only help investors  and future homeowner make wise decisions with their money.

(Jay Raman is a real estate investor, and he is the owner of a full service real estate property management firm, Ashoka Lion- www.AshokaLion.com. You can send emails to him through the “Contact Us” portion of the site)