How Hot Is The Real Estate Market? Example Of A 30% Overbid

how hot is the real estate market

Remember the $1.69 million three bedroom, two bathroom condo I used as an example in “How To Correctly Value And Analyze Property“? I forecast it would go for $1.85 million. 2553 Greenwich has a fantastic view of the Bay, but it doesn’t have a dedicated entrance, and it’s on three floors after walking up a flight of stairs.

I figured the property could easily reach $1,000/sqft in several years, or $2 million due to the view and upward trajectory of the SF real estate market. It turns out my estimate of $1.85 million was just wishful thinking of what I’d like to pay. A friend’s friend bid $2 million for the place cash and LOST! Just think about that for a minute. Someone was willing to pony up $300,000 above asking and still got a big fat rejection!

The only people who have $2 million cash liquid are those with net worths of at least $5 million if not much, much more. Of course someone with “only” a $2-3 million net worth fully invested in the stock market could just liquidate instead, but that’s highly unlikely. The multi-millionaires I know coincidentally follow two main Financial Samurai rules: 1) They don’t spend more than 1/10th of their gross income on cars, and 2) No one asset class makes up more than 50% of their net worth. They are highly diversified.

Lessons Learned From Not Selling My House

San Francisco Bay Area Home Price ChartsBack in the summer of 2012 I decided to test my house on the market to coincide with the Facebook IPO. (Should I Sell My House As Facebook Goes Public?) Although I didn’t want to sell my house, I was in a peculiar stage in my life where I was just coming off my WARN Act income after leaving my job of 11 years. With the great unknown ahead and a recovery in the housing market, maybe, just maybe I could entice a newly minted Facebook millionaire to buy my house for top dollar. With the cash proceeds I’d immediately fly to Vegas and bet it all on black to double my money! Just kidding.

My realtor was a tennis friend of mine who hounded me for literally a year to give him the listing. Because I was so reluctant to sell, I basically told him to list 5%-8% above the market hoping that my house would either not sell or I’d find an avid buyer and have no choice but to sell. It’s always a good idea to underprice your house in a hot market to create a bidding war. Overpricing is a buzz kill. The listing also gave me an excuse to finally paint my living and dining rooms I’d been putting off for years.

After about three and a half weeks on the market with several serious inquiries but no silly money I decided to pull the listing. My realtor begged me to keep the house up for a couple more weeks but I was sick and tired of the private showings. Deep down I continued to feel like selling at that time was a mistake given the recovering markets. But I also felt a little bad for my realtor given he spent so much time decorating and working on the marketing material. However, as soon as I thought about the six figure commission I’d have to pay, the guilt was replaced with disgust at the collusive pricing structure in the real estate industry.

Now that a year has passed, I can honestly say that I’m ecstatic to have kept my home. For starters, my house is my home where I plan to continue making great memories. Financially speaking, the real estate market in San Francisco has moved up anywhere from 8-30% depending on who you talk to due to a tightening labor market and continued low inventory. Prices are up about 12% nationwide YoY in April 2013 so the 8-30% range is in the ballpark.

This post will hopefully help homeowners who are thinking of selling or renters going through the process of buying in a recovering real estate market. Price gains should slow with the recent rise in interest rates, although you never know now that the herd is running in full force!

LESSONS FROM NOT SELLING A HOME

A Pricing Strategy To Maximize Rental Income And Minimize Turnover

San Francisco SkylineMy latest search for a tenant was not easy. After hosting six open houses over a one month period I’ve finally found the one who will hopefully stay for longer than one year, pay on time and take good care of the place. It’s a darn small world because her boss is a fellow tennis club member I see literally every week. He enthusiastically gave her a thumbs up so here’s hoping for the best!

The average search duration during my previous three changeovers took half as long. I attribute two reasons for the duration difference: 1) Pricing and 2) Pickiness. Over the past 10 years I’ve seen my net worth grow just like most of you. As a result, I’ve become more picky in choosing “the ideal tenant” because my rental property is decreasing as a percentage of my overall net worth. With such a decline comes a reduction in time I want to spend tending to this asset. Meanwhile, I raised my asking price by $400, equivalent to a 12.5% increase.

My first tenants were French citizens with no credit or rental history. I was a first time landlord back in 2005 who based my decision on gut and paystubs. They fortunately turned out to be terrific tenants who stayed for four years until they got married and decided to buy a place of their own. Perhaps I was lucky, or perhaps most tenants are simply honest to goodness people and being so thorough isn’t necessary.

With each subsequent tenant I’ve scrutinized just a little more. A minimum of 40X monthly rent for annual income and credit scores of over 720 are non-negotiable criteria now. The average credit score for a rejected mortgage applicant is 729 so I’m not far off. The one thing landlords need to realize, however, is that you can’t always get what you want. After the fifth showing I almost gave in by lowering my price, but figured out a win-win pricing strategy just in time.

MAXIMIZE YOUR RENTAL INCOME WHILE LOWERING TURNOVER

How To Correctly Value And Analyze Investment Property

SF Property BackyardUnlike stocks, there’s no easy way to ascertain the exact value of your current property or the property you plan to purchase. As a multi-property owner I’m glad there aren’t any ticker symbols jumping around every weekday because they are just a distraction. It’s all about buying, maintaining, and holding for as long as possible to build wealth when it comes to real estate.

Real estate currently makes up around 35-40% of my net worth where it will stay for the foreseeable future as I focus on entrepreneurial endeavors. The earnings that came from focusing on my career instead of chasing unicorns in the stock market was largely reinvested in real estate for diversification purposes.

In this article I’ll approach valuing property from an investor’s stand point. We’ll go through some big picture concepts as well as use a real life example to see whether we are making a good or bad investment. I think you’ll love this particular property I’ve picked. If you are already a homeowner, you’ll get to approach valuing your own property with as realistic an eye as possible.

VALUING PROPERTY – BIG PICTURE FUNDAMENTALS

How To Prevent Tenants From Abusing The Lease With Multiple Long Term Guests

Remodeling after tenant abuseWhen you book a hotel reservation the representative will ask for single, double, or multiple occupancy and charge accordingly. It’s the same idea when you rent out your property to prospective tenants. Those who plan to rent your property are written in the lease predominantly for legal purposes. Those who plan to stay in your property who are not on the lease are considered guests.

Sometimes your tenants will abuse the lease by having multiple guests stay for long durations of time. Of course having the girlfriend stay over for a couple nights a week or the parents visit for a couple weeks at a time is fine. However, where does one draw the line? Although restricting guests and their duration of stay is almost impossible to enforce, there has to be some language and understanding in the lease to prevent a rental from turning into a boarding house.

During my latest tenant search, I almost accepted two guys who would have fully taken advantage of the lease by having two to four guests all throughout the year. Here’s how things played out.

PREVENTING GUESTS FROM OVERSTAYING THEIR WELCOME

Documents Needed When Renting An Apartment

Amsterdam-rentalsAfter two years, my beloved tenant is leaving me for another man. My tenant is a single woman in her 50s who sold her house on the east coast to start a new life in San Francisco. She’s always wondered what the west coast fuss was all about so she decided to see for herself. After a year of work, she met someone and is now moving in with him.

I’m so sad to see my tenant go as she’s been wonderful. Yet, I’m so happy she’s found new love! I don’t know what it is about my rental property but every single tenant ends up marrying or finding someone special. Good feng shui perhaps!

As I wrote in my real estate vs. stocks post, real estate takes more effort to manage. I’ve got to now host multiple open houses and carefully vette my future tenants like the CIA to ensure the least amount of headache down the road. Thank goodness everything is so easy to do on Craigslist nowadays. I’ve got all the application forms and after almost 10 years of being a landlord, I know exactly what to look for.

If you are an aspiring landlord or a new renter in a hot market, this post should help provide some prospective to getting what you want.

CRITERIA AND DOCUMENTS NEEDED WHEN APPLYING TO RENT

The Ideal Amount Of Home Insurance To Protect Your Property

Old San Francisco VictorianEvery year I review my home insurance policy to make sure I’ve got the proper coverage. The reason why it’s important to check is because insurance policies change all the time. There might be discounts or special offerings for one. Meanwhile, your insurance company might slip in some extra charges without you even knowing. Finally, and perhaps most importantly, building costs are always rising thanks to inflation.

One of the worst things that can happen after a mishap is your home insurance policy covering much less than the true replacement cost. Even if your home appreciates by only 2% a year, if you don’t update your home insurance policy for 16 years, your policy will only cover half the rebuild cost! Let me share with you one of my rental property insurance mishaps and things you should think about when figuring out how much home insurance to get.

MAKE SURE YOU ARE COVERED 

How Landlords Can Raise The Rent Without Feeling Guilty

Overlooking a crowded beach in BrazilMany of my actions are driven by guilt. I’m constantly asking myself how I could be so lucky when there are so many folks just struggling to get by. My trip to India ten years ago made me stop overeating given all the poverty I saw. If I can’t help them, at least I won’t disrespect them through gluttony.

Even small, innocuous things are constantly being driven by guilt. After being up 4-2 in the second set against my friend Jaabir, I decided to tank the match just so he wouldn’t have to pay the $20 bet he initiated. I felt bad taking his money given he’s already down $140 this year alone. Lest you think I’m the one egging him on to bet, I’m not. He’s got an undesirable thirst to smack talk, while I have a consistent desire to defend my honor whenever challenged.

I absolutely hate raising the rent on my tenants because I feel bad. Although San Francisco rents went up by an estimated 12-15% in 2012, I only raised my tenant’s rent by 3%. My tenant is kickass awesome and to ask her for more money just felt dirty. The only time I do raise the rent is when there is turnover, which doesn’t happen too often.

One of the main reasons why I wrote, Renters Should Pay More Taxes is so that I could get over my guilt of raising rent. I’d much rather have the tenant pay the government directly for an increase in property taxes rather than through me. I wanted renters to get agitated by the notion of a “Renters Tax” where a renter sends in an annual check to their local assessors office twice a year based on the amount of rent they pay. This way, renters can directly experience the discomfort of paying for unnecessary spending and maybe, just maybe there will be less legislation that passes that sticks it to homeowners since we are the 30% minority.

It’s easy to spend another person’s money on yourself. With a Renters Tax, we all share in the burden of new government expenditures voted on by the people and will therefore think more carefully about the next legislation that proposes to raise taxes. The counter argument is that renters are already partially paying property taxes through the rent they pay. I realize this, but this is only true in a perfectly free market.

If there were no restrictions to the amount of rent a landlord could charge, and if landlords were not human beings with guilty consciences, but robots who could automatically adjust rent prices based on algorithms that measures current supply and demand, then a Renters Tax is not necessary. Unfortunately, a good portion of landlords do feel guilty. My fellow landlords I’ve surveyed all say that guilt is their #1 reason for not raising the rent to market rates. The #2 reason is rent control. If you own a multiple unit building in San Francisco that was built before 1970, a landlord can only raise rent by an index earmarked to inflation e.g. 1-3% a year.

If you read the fiery comments from the Renters Should Pay More Taxes post, you’ll see that renters bristle at the idea of paying more taxes just like homeowners. Hence, I think I’ve created a understanding between homeowners and renters where everybody who votes for more spending is willing to pay more taxes and therefore higher rents.

CHARGE WHAT THE MARKET CAN BEAR

How To Lower Your Property Taxes: An Inside Look At How Property Assessors Screw Homeowners

Spring Blooming Cherry BlossomsYour property assessors’ #1 goal is to collect as much property tax from you as possible. Your goal as a homeowner is to make your home look like the dumpiest of dumps to pay the least amount of property tax possible. An asteroid could wipe out your entire city, but if the assessors office survives, they will come for you to collect!

Ever since the downturn, I’ve religiously filed a property tax appeal to get my assessed value lowered. In the midst of the financial crisis I was shocked that the assessors office appraised my primary residence for $100,000 more. If they got away with it, I would have paid roughly $1,200 more in property taxes that year. I ultimately won my appeal three months later and kept my assessed value the same as before.

For the next three years I got more aggressive and managed to lower my assessed value $100,000 below my purchase price. When the world is falling apart, it’s an easy sell to say your property’s value is also going down the tubes. In fact, my goal is to get the city to assess my property as close to $0 as possible.

Now that real estate is roaring back, I’m having a much harder time convincing the city I live in a rundown shack. This post will highlight how I almost got screwed over by the San Francisco property assessor again, and how I fought back and came to a compromise. Just like how every homeowner should be taking action to refinance their mortgage, every homeowner should take action by filing property tax appeals!

A CONVERSATION WITH AN ANGRY PROPERTY ASSESSOR EMPLOYEE

Which Is A Better Investment: Real Estate Or Stocks?

Classic San Francisco Victorian In Haight DistrictWe’ve got real estate tycoons and we’ve got stock market tycoons. We’ve even got wealthy bond investors such as PIMCO’s Bill Gross who pulls in over $100 million a year, but let’s forget about bonds for now. Now that everything is heading up, I’d like to have an open discussion on which asset class provides the the most amount of wealth over the long run.

With my net worth split roughly 40/30/30 between real estate, stocks, and CDs, you might assume that I like all three asset classes somewhat equally. The fact of the matter is I would much rather have 60% of my net worth in real estate, 35% in stocks, and 5% in CDs at this present time. Unfortunately, shifting one’s net worth around isn’t as easy as snapping one’s fingers. (See: “Recommended Net Worth Allocation By Age And Work Experience“)

It’s important to realize there are no renter or cash tycoons. The return on rent is always -100% every single month. Meanwhile, the return on cash averages a paltry 0.1% nationwide. You can certainly be a wealthy renter with tons of cash in the bank. But your wealth was accumulated through other means so don’t get confused. Having a money strength grade of F– is no way to go.

In this article I will explain to you why I have a preference for real estate over stocks (equities). Both have proven worthy of building great wealth over time, however real estate is going to provide the most return over the next 10 years in my opinion. I’ll do my best to make the case for both asset classes.

REASONS WHY REAL ESTATE IS BETTER THAN STOCKS