No Financing Contingency Offer: A Way To Pay All Cash For A Property Without Having The Cash

Park ViewIt’s official. I lost my first overbid in this crazy San Francisco property market.

The property was a single family house, 3/3, on a small lot, overlooking a park asking $1.299 million (picture). I’ve known the listing agent for a while and she mentioned that $1.35 million would get it done, but I was thinking $1.2 million instead. She had two other over-asking offers, but I couldn’t muster up the courage to bid more than $1.315 million.

It wasn’t a big loss because the property didn’t tug at my heart. I figure, if I’m going to be spending more than a million bucks on a property, I better be excited, or else why bother. Yes, property prices are crazy out here in San Francisco, but this price point is actually relatively good value.

I’ve been agonizing over paying down my existing rental property mortgages or leveraging up to buy more property. The jury is still out, but I’m willing to at least prospect around to see if there’s anything I like before making a decision. Besides, I figure this latest house hunting experience will provide good educational content for other folks looking to buy in a hot property market.

The Best Time To Buy Property Is When You Can Afford It

Historical Nominal Home Prices

Now that I’m back in the property hunt, I realize more than ever that the best time to buy property is when you can afford it. Perhaps my belief is not as true for cities that are dying from the inside. But for those people who want to buy property because their incomes are growing, a baby or two are on the way, or they simple no longer want to be price takers in an ever rising rental market, buying property when you can afford to buy is most likely a good choice.

It’s important to realize that if you rent, you are short the property market. Every time rents and property prices go up, you’re losing. If property and rental prices go down, you’re winning. Over the long run, shorting the property market doesn’t make sense because property prices having been going up since the beginning of property ownership in our country.

Shorting the property market is like shorting population growth or inflation. Bad move if you want to build wealth. I encourage readers to be at least NEUTRAL property. And the easiest way to be neutral property is to own your primary residence. Your asset will rise and fall with the market, and your payments will remain fixed or go down in real dollar terms over time.

Pay Down Debt Or Leverage Up To Buy More Property?

Palace Of Fine Arts, San FranciscoI’ve been dreading this day for the past five years. First Republic Bank sent me a letter in the mail stating that one of my 5-year CDs is coming due and that I have a seven day grace period to withdraw my funds before they renew for another 5-year term. I would be fine with renewing except for the fact that the renewal interest rate is only 2.2% vs. the 4.2% I’ve been receiving. I’m not locking my money up five years for a lousy 2.2% a year, no way.

The post “CD Investment Alternatives: Why I’m No Longer Investing In CDs” provides a longer explanation of why buying a CD now is suboptimal. But curiously enough, it doesn’t highlight the one investment that I’ve been gravitating towards since I received the letter from the bank: real estate.

Real estate is my favorite asset class, even though I’ve discussed selling my rental properties in the past due to the headache of dealing with tenant issues. I just love being able to live in my investment, do things to improve the value of my investment, and wake up 10 years later with a high probability of holding an appreciated asset with a lower mortgage. The tax benefits aren’t bad either.

A deep dive assessment of all my assets shows that real estate has provided the highest return on capital invested with the least amount of stress. I have a tendency to speculate in stocks in order to find that multi-bagger return that has eluded me since 2000. Many of my speculative bets have turned sour and I don’t want the temptation to speculate with larger amounts of money. The last thing I want to do is use my risk-free money to invest in stocks. I absolutely hate losing money and I’ve already got 25% of my net worth in the stock market. (See: Net Worth Allocation Recommendation By Age)

Either Zillow Is Broken Or We’re In A Massive Housing Bubble

In January 2014 I wrote a post entitled, “Exploit Online Data To Lower Your Property Taxes“. In the post I highlighted a chart of my house’s estimate value by Zillow. The chart looks like a internet stock from 1999-2000. The chart significantly impedes my efforts to lower my property taxes this year because property assessors use online sources such as Zillow to partly make their assessments.

Since the publication of the post, the chart has continued to go up every day (see below). We’re now close to 300 days in a row of price increases according to Zillow. Are you looking at a new billionaire in the making who only hangs out with super models? Or is Zillow completely wrong? There is no way my home price could be up 60% since May 2013. Furthermore, there is no way prices can rise every day in a straight line for 10 months in a row. Just looking at the gap between the bold blue line and the dotted line (average price of my area) shows things are out of whack.

Thank goodness San Francisco is limited to raising property taxes by around 3%. But for someone like me who was able to successfully lower my property valuation for years, I will now be reset back to the original assessed value +3% a year catchup if I fail this year.

Housing Bubble Chart

Zillow is either broken, or San Francisco is in a massive housing bubble. Thanks to the robust growth of tech companies here in the Bay Area (e.g. Facebook at record highs, AirBNB and DropBox going public next, etc), I don’t think San Francisco is in a housing bubble. I don’t even have to mention rent control, land restrictions, good weather, and an international city as other reasons for propping up demand. We’re probably in the sixth inning of a dramatically tight ball game. 

Do Landlords Have The Right To Maximize Rental Profits?

Rent Control Causes A Shortage

Rent control leads to a shortage

One of the key income streams to obtain for financial independence is rental income. Not only will rent increase over time in good locations, your asset value will also increase as well. One day the mortgage will be gone and you’ll have this wonderful asset producing a stable income to take care of you and your family. But before you get to glory, a lot of hard work and soul-searching must be committed along the way.

The other day I received a lovely comment on my post, “How To Raise The Rent, Extend A Lease, And Get Rich As A Landlord“. We all know by now that landlords are greedy and evil people, especially those of us who own property in San Francisco. So this comment below simply reinforces the notion that you should never let your son or daughter marry a property owner.

YOU SHOULD ALL BE ASHAMED OF YOURSELVES!!!!! Conniving to use your power over your tenants to manipulate them into a situation that forces them to choose between the stress and hassle of uprooting their lives, and coughing up some amount you designate oh so carefully and gently deliver to line your own pockets.

I know you own it and you deserve to make a profit. BUT COME ON….The mortgage DECREASED by 23% but you still jack up the rent? You expect us to think that maintenance costs jumped up THAT MUCH that a 23% decrease in your mortgage doesn’t offset it???? That’s just a lie you tell yourself to ease your conscience. And the despicable lies you tell them to make them feel like they’re getting a deal and that you “probably” won’t increase it next time when you’re publishing articles on how to beguile them so you can do just that??? Wow.

It’s your property and it’s a business, granted, but you are absolutely heartless for sticking it to those who make their home in your “business”. Renters already have NO RIGHTS in this city so thanks a lot for publishing the tools for those in power to continue to stick it to us. I honestly don’t know how you sleep at night…oh wait….on the Egyptian cotton sheets the brand new parents who are probably doing their best to save for their kids college funds are buying you. Sweet Dreams Samurai.

That’s it! I’m giving away all my property now. Who wants some? The commenter makes some good points. However, if you know how to negotiate well by understanding one’s Best Alternative To A Negotiated Agreement (BATNA), you can increase your returns – and that goes for both sides. Besides arguing why landlords have the right to maximize profits, I’ll also share with renters how they can keep rents down in this post. Call me an equal opportunity advisor.

The only beef I have with this commenter is that she missed one thing: I only sleep on the finest Moroccan cotton sheets after I bathe myself in Evian water. Where’s my baby giraffe? Come on now!