Real Estate Is The Next Asset Class To Fall And Why I’m Not Worried

Is real estate the next asset class to fall? I thought so on January 13, 2016 when I first wrote this post. Then I sold my rental property in 2017 and watched real estate weaken in 2018. However, post-pandemic, the housing market is back and stronger than ever!

Let me share with you from sentiments in the past and see if we can learn from them. It is worth worrying about the housing market again given the huge price increases. Real estate should do well post-pandemic given rates will stay low, job growth is rebounding, and huge wealth has been created in the stock market.

Real Estate Is The Next Asset Class To Fall And Why I'm Not Worried

You might think I'm feeling relatively sanguine during times of market volatility given less than 30% of my net worth consists of stocks. If the S&P 500 corrects by 50%, I only lose 15% of my net worth right? Well that's absolutely wrong because whenever the stock market corrects, the real estate market is never too far behind.

Roughly 40% of my net worth is in San Francisco/Lake Tahoe/Hawaii real estate. If the weakness in the equities market continues, it's always a reflection that corporate earnings are under fire. Less earnings means less jobs. Less jobs means less disposable income. Less disposable income means the demand for housing declines.

Even if you are doing relatively well, there's a psychological desire to hold off on buying anything due to the expectation that prices will go lower. The specter of deflation is an economist's worst nightmare.

Why You Shouldn't Fear A Real Estate Market Correction

I've come to grips my real estate holdings will decline in value over the next two to three years. If I could sell at least one property for less than a 1% fee in a click of a button, I probably would. Unfortunately, the internet has so far failed in lowering real estate commissions much below 5%.

For those of you with real estate, I think you should mentally expect a decline in your real estate holdings as well. Trees don't grow towards the sky forever. Sometimes they get decimated due to wind, fire, lightening, or torrential rain.

So much about achieving financial freedom is believing everything will be OK in the end while doing everything possible to improve the things you can control. Let me share with you why I'm not worried about a large potential decline in my net worth, and why you shouldn't either if you own property.

Reasons To Stay Sanguine

1) Your primary residence is your home. Real estate is my favorite asset class primarily because it provides incredible utility compared to stocks. During the housing crash, all I remember about living in my home is the late night snuggling on the coach watching a favorite movie, potluck parties with friends, and BBQs on the deck.

There are so many fantastic memories even though at one point my house's value probably declined by 20%. I prefer living in a nice home rather than trying to squirrel away money by living in a crappy rental. Life is meant to be lived now, and a home is where we spend the most amount of our time. Always buy real estate for a better lifestyle first, then consider capital appreciation and rental income.

2) Rents are incredibly sticky on the way down. If you buy gas for your automobile, you are understandably amazed and annoyed how quickly gas prices skyrocket, but  decline so slowly. If you own rental property, there's a reason for sticky rent. A contract! After 11 years as a landlord, I've never once had to lower my rent. By the time my tenant leaves, the downturn has ceased because bad economic cycles generally don't last longer than the average duration of my tenant. For example, the last recession only lasted a couple years.

Real Estate Income Is Sticky

3) Occupancy can be improved through hustle. You have the ability to increase your occupancy rate if you negotiate and plan well. I've not had one month of vacancy in 11 years due to open communications and aggressive hustle. In other words, you can positively affect your outcome, unlike the stock market where you are a passive investor.

4) Costs decline in a down market. During the last downturn, for four years I successfully reduced my property taxes. The goal of every property owner is to make their house worth ZERO in the eyes of the property assessor's office every year. You'll also be able to refinance your mortgage as investors flee to the safety of bonds as they are doing now. I've refinanced multiple properties around 10 times, saving me hundreds of thousands of dollars in mortgage interest. Finally, when real estate is out of favor, you can get contractors to do home improvement projects cheaper.

5) Opportunities to upgrade increase. It's human nature to always look to upgrade to that next nicer home. Even though your $500,000 home may have declined 20%, if the $2,000,000 home also declines by 20%, you've caught up by $300,000! (you lost $100,000, but the new house is $400,000 cheaper). I don't plan on buying a new home in 2017-2019, but with my CDs coming due, perhaps I might just go for a nicer pad and write about my journey.

6) The government has your back. The government wants Americans to own homes. This is why they provide $250,000/$500,000 in tax free profits for individuals/married couples when they sell. The government also allows you to deduct 100% of your mortgage interest up to $1 million in mortgage indebtedness plus the interest from a $100,000 HELOC. If you make even more than $250K/$500K in profits, you can simply roll your property into a new one via a 1031 Exchange and never pay taxes. Finally, the government has a history of bailing out homeowners who've stopped paying their mortgages due to whatever reason. All of these benefits are for the price of yearly property taxes.

Stocks compared to housing historical price chart

7) You'll eventually have a paid off asset. No matter what happens in life, so long as you pay your PMI mortgage on time, you'll eventually have a paid off home. If you look at property over a 30 year period, chances are extremely high the nominal value will be much more than your purchase price. During this time, you'll have enjoyed your life (#1) while completely adapting your spending to your mortgage payment. I've owned one property for 11 years now and it feels amazing that even if I don't pay extra principal, the property will be completely paid off in 19 years automatically.

8) It feels good helping the next generation. Buying a house after college can be very difficult given the downpayment and the price of homes in high job growth areas. If I can provide subsidized shelter for my children (not free, b/c there won't be any free-riders in my family), then they can focus on pursuing a career more true to their hearts without overly worrying about making money. They can also focus on saving for retirement, starting a family, and all sorts of wonderful things when housing becomes less of a burden.

9) It won't be as bad as the last downturn. The good thing about going through the worst financial crisis in history and surviving is that the next go around won't be as bad. Since the last housing downturn banks have tightened their lending standards so that only the most prime borrowers who put significant down payments can get a loan.

Banks, themselves, are much more capitalized with higher tier 1 capital requirement ratios. I feel happy that because my mortgage refinance was rejected in 2015, those who are getting loans have rock solid financials better than a 800 FICO score and $250,000 in income.

Related: What If You Buy A Home At The Top Of The Market


Historical Home Price Chart

60-70% of my net worth is going to take a hit from a potential downturn. I've accepted this inevitability and so should you if you own stocks and real estate. In the meantime, I'm working hard to build more income and savings through my online business and other side hustles to help soften the blow. My hope is to actually make my business so big that it pushes stocks and real estate to comfortably under 50% of my entire net worth.

Nobody should be in a rush to buy real estate now. Periods of weakness never only last for a year. Be super picky about what you buy and the terms of your contract.

Don't be afraid to back out of a deal because there will always be another real estate opportunity. The best time to buy is almost always when there's blood on the streets. The key is to have enough cash and cash flow on hand to take advantage of opportunity.

Invest In The Heartland Of America Real Estate

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Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. Heartland real estate where there is more value. The demographic trend post-pandemic is towards lower-cost areas of the country.

Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look.

Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

Shop Around For A Mortgage

Check the latest mortgage rates online through Credible. Credible has one of the largest networks of lenders that compete for your business. You can get free, no-obligation quotes in minutes. The more lenders compete for your business, the lower your rate. Mortgage rates continue to be near all-time lows. Take advantage. 

Latest mortgage rates

73 thoughts on “Real Estate Is The Next Asset Class To Fall And Why I’m Not Worried”

  1. I have a SFH rental property(valued $700K) with no mortgage and currently collects $3K/mon rent. I want to sell it and 1031 exchange to a triple net commercial retail property with 5% cap. My reason to sell because of my cap rate low for instance, $3k/mon – $1k expense=$2k/mon cash flow. Cap rate $2k x 12=$24,000/$700k equal 3.4% cap. If I 1031 exchange to a similar property with 5% cap which earn me $35,000/year. I bought SFH rental property in 1994 for $200K. Should I sell it and exchange to a commercial retail? Please advise.

  2. Hi Sam,

    I currently live in Manhattan where I’ve been a coop owner for the past three years. Although I love my home, the coop board only allows up to 2 years of sublease for the lifetime I own it. Also, the board nickel and dime the owners — there is even a 2% flip tax if you choose to sell!

    Lately, I thought about moving out to San Francisco. I’ve read and reread your articles on purchasing a home in San Francisco. You have some great pointers, but some are conflicting with one another and I’d love some clarification if you have time. You’ve said…

    * Buy in an up and coming neighborhood
    * Buy property in a micro area few people have ever heard of
    * Buy in the most prime neighborhood possible
    * Buy property close to the best schools and convenient transportation
    * Not only should you buy a home with expansion potential, you should consider buying a home in the most expensive neighborhood with the largest expansion potential possible.

    In other articles, you’ve suggested the readers to look into Golden Gate Heights which is an up and coming neighborhood that no one ever heard of. However, you also say to buy in the most prime neighborhood possible. Which is it?

    What is the cost of construction in San Francisco? Is it worth to expand and remodel or purchase something more turnkey? In Manhattan, it’s more expensive to remodel a fixer-upper than buying something already finished.

    If I’m interested in a single family house or condo with an expansion potential in an up and coming area with a 7 year discovery time, where should I start — this will be my primary home with an option to rent it out later? What are the prices I should expect? Now that it’s 2016, do you have a different perspective than you did back in 2014 prior to purchasing your current residence?

    Being single, I have the flexibility with using various tactics to lower my monthly expenses like having roommates or shared economy route for example. Should I look for something smaller in an expensive neighborhood instead?

    Finally, I’ve heard that there might be a tech bubble this year (2016). I know that people have said that for the past 2-3 years, but my tech friends are verifying that this year might be it. How will this correction affect the real estate market? Is it best to wait a few months to see if the other shoe drops?

  3. Hey Sam are you saying not to buy now because you are forseeing market downturn which will result in a better buying opportunity later?

    In my area (Central Florida) rent is about the same as a mortgage and I am seriously thinking about buying. The market is such a sellers market here that the 2.5months of inventory is causing any good deal to be snapped up within one day of listing. You almost have to bypass a buyers agent all together and go right to the listing (sellers) agent. We are ready to buy now but at the same time I would like to wait until prices come down a bit. But what if they keep rising as well as rates!? This whole process is making my head hurt. I wish I had a crystal ball!

  4. As a poor renter, I have long chafed at the many ways government rigs the rules to redistribute income upward from renters to owners.

    Government really wants only the middle class and higher income groups to own a home; municipal codes are rife with home ownership hurdles difficult for the poor and working class to overcome. e.g. minimum lot size requirements effectively limit renters’ choices to “more home than they can afford to buy” and “buying nothing and continuing to pay through the nose to rent”.

    In other words, government ensures landlord profits by maintaining an ample pool of renters unable to buy a home. The landlord tax benefits don’t help renters, either.

    1. Terry,

      Look at the bright side. As a renter you don’t have to pay 1.2% of the value of your property every year to support the roads, schools, public facilities, and wages of our service people who are vital to have a smooth running environment.

      For example, I pay literally $40,000 a YEAR in property taxes alone. I certainly do not consume $40,000 a year in public services. Maybe if I had 4-5 kids, yes, but I don’t. I also pay even more than that in income tax rates.

      As the saying goes, if you can’t beat them, join them!

      You might enjoy this post: Going John Galt And Protesting Government Waste

  5. Hey Sam…

    I have to comment on your “Unfortunately, the internet has so far failed in lowering real estate commissions much below 5%.” I can’t tell you how many times I have heard “There is no way I am going to pay a Realtor $36,000 to sell my $600K home.” After all, taking that “realtor” commission chunk out every time really hurts the liquidity aspect of an investment property. Even with the cost of capital unusually low, these realtor commissions hurt.

    I just heard about a new tech start up that is suppose to change all of this. Apparently their LB 2.0 launch this month brings the FREE MARKET to real estate commission fees. They say Sellers can invite their own list of Realtors to commission bid against each other while the Seller remains anonymous. Have you seen it or analyzed it? It is called ListingBidder. I found them on Twitter and YouTube.

  6. I certainly don’t want to see my net worth go down with dropping property values, but it’s definitely possible. The market in San Francisco is softening after such a long run up. There’s also some winter seasonal slowness thrown in there but I think demand will likely cool off this year. If China’s stock market continues to tank there will probably be fewer Chinese buyers in the Bay Area as well, also lowering demand. But I don’t think there will be a cratering here. SF is still a very popular place to live and I don’t see that changing any time soon.

  7. When you say the 40% of your net worth is in real estate, is this calculation based on the amount of equity you have in each house or the total value of each house? Just curious as it makes a big difference for my calculations since I don’t have a lot of equity in my house or rental property.

  8. Prof. Services Consultant

    Hey Sam, how much of a consideration is politics when you decide on buying real estate to live in? As nice as the weather is in California, if I became an IPO millionaire it seems like I would rather spend less money for a just as nice of a house in a place with no income tax like Texas or Florida! California has high costs, high taxes, a nanny state, too many rules, laws, and regulations. For a libertarian leaning person like myself, CA sounds like a nightmare.

    What do you think about it?

    1. Politics isn’t part of my consideration when it comes to buying real estate. But I am aware of the various policies that aggressively tax homeowners in California to pay for a lot of the public services, whether you have children, a big family, use the services or not.

      The key really is to try to make less than $200,000 a year. That income level tends to be the cross point where higher taxes are levied. I definitely see the allure of moving to Washington, Texas, Florida, maybe even Alaska. But life is pretty great here if you don’t have to pay too many taxes. I have yet to receive a IPO million-dollar Wynfal I definitely see the allure of moving to Washington, Texas, Florida, maybe even Alaska. But life is pretty great here if you don’t have to pay too many taxes. I have yet to receive a IPO million-dollar windfall, so I can’t tell you with certainty how I’ll feel.

      Check out:

  9. Sam, what should prospective buyers (like me) do if they plan on buying within the next 1-2 years? I am looking at a specific market in the Bay Area where prices are not too high, but I can see them dropping in a hurry since it is at most a class b neighborhood. I also do not want to immediately purchase and have negative equity since prices in the neighborhood could fall a good amount. I am in this house for the long haul.

    As to the real estate commission, why not sell it through an attorney, whose hourly fee would be much less than 6%, and who would owe you a greater duty of loyalty than any agent?

      1. My partner and I have been lifelong surfers and have prioritized being on the coast over all other factors. Coastal Bay Area, other than Ocean Beach, is still overlooked and still maintains its blue collar vibe with some exceptions. This is probably due to OK schools, and extra time it takes to access the rest of the Bay Area due to the Santa Cruz mountains. I don’t think there truly is a tier 1 location on the coast outside of SF, but of course there are tier 1 houses and prices to match.

        I think there is still value in my market, but inventory is low and dominated by 3/1 properties.

        Thanks for the link.

        1. Very cool. You are focusing on lifestyle it seems, so that’s great!

          Ocean Beach seems to be getting more interest from developers and buyers here in SF. We shall see. I can see Ocean Beach from my house :)

  10. Expat Warrior

    Renting out property is great, but there is still the risk that a tenant will pay late or not at all or destroy the place.

  11. Sam – is that your property in the first photo?

    From our perspective, we are in a small 2 bed terraced house in the UK. It’s fine for the moment, but we will probably look to move at some point in the future. I’d love to be able to hold onto it and rent it out if we do move house, as the houses in this area rent so quick.

    Carrying on saving like we are we will be effectively be mortgage free in 3 years (savings > mortgage). Will be tempting at that point to pay it off in full :) Even if saving into the market makes sense in the long run, there’s something to be said about peace of mind!


    1. Unfortunately no. It is the bathroom of the Minecraft founder who sold his company to Microsoft for several billion. The house is in LA and is worth about $70M.

      I shoulda bought London property in 2005!

  12. Vistahermosa

    When buying, i approach the seller’s agent and say i dont have an agent and will they represent me and agree to give me 2% back of the 6% at closing. The seller’s agent is looking at 4 percent commission with me instead of 3 percent with someone who is represented by another agent. And then the seller’s agent will sell out his seller and share all kinds of inappropriate info re seller’s motivations etc and push my offer over other better offers. Turning the seller’s agent into a conflicted dual agent is a great way to play the game.

    1. I had the opposite experience. We used a dual agent for our purchase of a property in 2011. The property we were trying to buy was appraised for significantly less than our offer. The “dual agent” was worried that the sell would fall through so she reached out to the appraiser to try to increase the appraisal value to match our offer. Fortunately for us, the appraiser wouldn’t budge, we reoffered the appraised value, the sellers agreed, and we got the property for much lower than our original offer. She was working in the best interest of neither party, but was only interested in “completing the transaction.” No bueno.

  13. Sam, I found your site after I locked in a 30yr fixed. I am totally sold on refinancing to 5/1 ARM when rates dip lower. What should be the difference between the 30yr fixed and %/1 ARM to make this exercise beneficial?

    1. Take a look at the yield curve to find the difference between the two durations. 1% or more is usually the spread. Although, the yield curve is now flattening. I FIRMLY believe interest rates are not going up for many, many years. Hence, I’m happy to take the “risk” of only saving 1% a year or maybe even less.

  14. Just curious, do you lock in rental period for say 2 years at least with potential rental reversion built in?

    1. In SF, you can only lock in a 1 year lease, and then month to month after that. I have done two year leases, but it’s more a formality. In a rising market, it is good to be month to month. In a declining market, not as good, but finding new housing to save $100-$300 is a pain for a place like SF. Not sure how it is in Singapore?

  15. Cash flowing real estate is a great place to be. Any shocks will hurt, but as long as the rents can cover the PITI, investors should be able to recover in due time.

    When it comes to stocks, I’m just way too much of a wimp to stick out that trade…

    I’m with you on hoarding cash…

    All the best in what probably will be a most tumultuous 2016!

  16. In Canada, some of my properties experience a bit of a down turn due to the downturn in oil prices. But I’m not worried, it’s just part of the cycle, just like stocks, there’s up and downs. If your strategy is buy and hold for 20+ years, why worry. It just means lower interest rates in Canada! And over the past two years, appreciation has drastically slowed down if not gone down but my networth is still growing because my rental properties are getting paid down year by year as long as I have tenants. Appreciation is icing on the cake, can’t always count on it because of the market.

    1. Steve Adams

      Are prices pretty stable in Canadian dollars now? Would be interesting to see if there is a deal for US buyers now that C% is down 70%.

      Too bad it’s not warm there – would be good time for vacation property buy.

  17. We have 65% of our net worth in real estate (Primary house in bay area and rentals in bay area). I am sure I will get nervous if the market falls beyond 15% but will not panic and sell. I think the high fee to sell and the longer time to sell actually works in favor of not selling in a downturn unless you are forced to.

    The stock market fluctuations on the other hand stress me out a lot more as the changes are very visible everyday and you can sell them easily and more chance of panic and selling.

  18. I can confirm your statement “I never have to lower my rent”. I rented out a unit at $550, then the stock market crashed followed by the real estate market crash. My tenant moved out, instead of listing fr $500 or $550. I listed for $650. Then, that tenant moved out, I listed $750. Now, it’s $800. This is all happening during the economic downturn. That was why you see the ads for house for sell “cheaper than rent”.

  19. Readers like me cannot be more grateful for the information and thinking you share in the website. I have been looking at the stock trend vs house price in bubble: it seems that house price did not fall, instead it just slowed it growth rate. So I am wondering whether the house price in the next two years will be like 2008 or like 2001? As some other people said in the earlier posts, foreign buyers tend to invest more in Americen real estate + millennium.

  20. I would love to see real estate prices tank. It would mean it was a GREAT buying opportunity for those of us with cash.

    One key to why my 14 properties do so well is that I got them at great deals shortly after the 2008/09 financial collapse.

  21. Hi Sam,
    Can you please tell us more about how to reduce our property tax? Is there any previous post related to this? Thank you!

    1. Steve Adams

      Buy a smaller property or live in a low tax area.

      Pretty much it unless you can bribe a government hired appraiser. – Probably a bad idea. :)

  22. I highly recommend primary residence as a real estate holding for financial and enjoyment reasons. Not so much on rental real estate since it takes so much time to get really strong positive cash flow and the expenses of maintaining the property and dealing with tenants. You really need to be a property manager to be successful financially and can’t farm out the cost of property management. I own both primary and rental and will get rid of the rental at a good time. I’ve had the rental for 20 years. Only benefit of owning the rental is for the diversification (and relative stability) so that I don’t have so much as a percent in stocks. The capital gains on the rental and the net rental income isn’t as much as I could get in stock dividends and capital gains. That’s been my experience. But if you’re going to buy rental property it is still the old saying that it is only worth it in the best locations of the country. And manage it yourself.

  23. This has been much on my mind lately as we’re likely to move East in the next 2 years before our children start school. Living so close to all of Apple’s current and future campuses, our home value has skyrocketed well past its 2008 peak. Given the economy, I fully expect a correction, it’s just a question of when and how large.

    Given our timeframe, I expect to get caught out, but worst case, we can hold onto the property and rent it out via a management firm until the markets recover. Although it would slow down our plans to purchase more rental properties. Depending on the timing, it may make sense to take the equity hit in the trough and sell in order to reinvest it closer to home while the prices are still down. Need to think about the tax implications more thoroughly.

    Looking forward to having some rental properties and being able to take advantage of 1031 exchange.

    1. The great thing is, no matter where you move to, except for Manhattan, your Bay Area real estate will buy you much house.

      The one X factor is IPOs. Even though the IPO market sucks for tech/internet companies as valuations come down to Earth, there will still be HUGE windfalls if AirBnB, Uber, Pinterest, Palantir and others go public. I’ve spoken to several $170,000+ income earners at Uber and they all can’t wait to try and buy a $1.5 – $2 M house once public. It’s not like they want to spend that much money, it’s just what it costs to get a decent 3/2 or 3/3 Single Family Home in the Bay Area nowadays.

      But again, I see the RE market softening hear and everywhere. Flat to down 10% is totally in the ballpark over the next 2-3 years.

      1. Do the $170k folks expect a huge life changing windfall if their companies go public or just a nice chunk for a sizable downpayment? One of your earlier articles mentioned most non founder employees won’t get very rich at private companies

        1. Not life changing. Enough for 20% down payments on $1.5-$2M homes.

          For example, $500,000 in RSUs vesting over 4 years, so that is $125,000 a year plus $170k+ salaries. 300k gross, $210k after tax. Save $110k a year for 3-4 years and you are there.

          Real estate is about sentiment and incremental demand since there’s not that much inventory compared to the housing stock.

          1. Thanks, appreciate the insight. I was curious since I’m not in the startup industry now, but lived through the dotcom boom in the 90s when enough people who joined the right companies at the right time and wasn’t too greedy did make a decent size fortune so that it was a realistic goal for even for rank and file workers. It seems the companies that went public in the past year in tech mostly haven’t been doing well. I’m curious to see how the Uber, AirBnB, Palantir, and other unicorns will do once they have to face Wall Street scrutiny quarterly.

            1. I guess it depends on what is considered a fortune? Plenty of people will make $500,000 – $3M here in the Bay Area. Is that a fortune? Not sure if a nice house costs $1.5-$2M. It’s all relative!

          2. The high real estate costs make it difficult for tech guys in the $170k+ range to even consider reaching financial independence early especially if they are single income families who have to put kids through school! I guess it gives more motivation to hustle side businesses.

  24. Hi Sam, do you think there’s a possibility that individual mortgages/houses will be sold through online exchanges and brokers (not MBS)? I don’t see commissions ever getting as low as 1% because there’s not enough volume of sales and liquidity as stocks and bonds. Also I think from the sell-side point of view we won’t have too many brokers and real estate agents around who are willing to work in an industry with commissions so thin.

    1. Probably not through an exchange due to the lack of volume.

      The irony is that b/c of high commission rates, there’s less commissions for the entire industry b/c nobody in their right mind would pay a 5%+ commission rate unless they absolutely had to. A $50,000 commission on a $1M house is too expensive. A $100,000 commission on a $2M house is EGREGIOUS.

      Maybe if the internet did not exist would 5% be OK. But the internet does exist and I’ve found all my properties myself, and even negotiated with the selling agent to represent me to save on cost with my last property. We came to an agreement and it was so easy. DocuSign makes bidding on a property literally 2 minutes.

      The industry is ripe for disruption. Zillow/Trulia/Redfin make most of their money from real estate agents, so they need to be careful not to crush the hands that feed them. But if you look at ZG, the stock is getting crushed already. Buying Trulia was the top.

      1. I totally agree with you, Sam. Over the past three weeks I’ve made it my mission to learn how to go the for sale by owner route. After slogging it out on Zillow and Postlets, we did three open houses and 30 looky loos but no credible offers. Not to mention the constant barrage of sellers agents trying to convince me that I needed to work with them. The GAME CHANGER was working with a broker on a fixed fee limited representation arrangement basis. In Arizona, I was able to post my listing to ARMLS and the agent would forward me any communication he was receiving from interested agents with buyers. Once you have a credible listing with great pictures(Google has the picture app where you can add light, pop, and color for free), my phone rang off the hook. 8 viewings in two days and three offers which I used to leverage a best and final offer for higher than our asking price. I reached out to a few realestate friends to get comps for the market and we were spot on for the asking price.

        I worked with Congress realty who covers the western half of the US and they were also planning to send me a lock box and a standard sign all for 350 dollars. No reason to pay a realtor if you are still living in the market and have 45 to 60 days to sell. The contract documents are not complex and if your an honest person who takes care of their home you have nothing to hide.

        Redefy was also another flat fee service which charges 2500 dollars and they have compartmentalized the job into individuals doing the marketing, agent rep, contract work, etc. I see disruption happening on the seller side but still a long way to go.

        Sam if you need material for a post on this topic let me know.

      2. Totally agree with you there Sam!

        I too think the international buyers will be one of the main forces that tap into the US real estate investment properties next and if the realtors here can pull off international sales by being multilingual or familiar with foreign culture, that’s one aspect I see why people should pay more than 1% in commission — otherwise, I really don’t see the value in 5%+ in commission.

        Well, as a native Chinese speaker myself, I am obviously biased, hehe.

  25. I’m not worried either. First, I think that Congress’s recent increase in FIRPTA withholding is going to result in quite a bit more foreign investment in U.S. real estate. Second, millennials don’t really want to buy yet – they prefer renting apartments with nice amenities, as do baby boomers who are downsizing, so I think at least the apartment market could stay stable regardless of how the rest of the economy performs. Third, I’m saving my cash for a buying opportunities, as you said. I’d love to see opportunities to buy at a 10 cap or better come back! And fourth, I guess I could refinance my existing mortgage, but it’s hard to imagine rates will go lower than they already were.

    1. Interesting comment on FIRPTA. I didn’t know what that was (linking to it). US real estate is so cheap compared to other major international cities in the world.

      Every Chinese business person I talk to based in the mainland has thought of ways to extract their wealth from the country. One of the top assets is US prime real estate. The top destinations are Vancouver, San Francisco, LA, and New York City.

      I’m biased, and think SF is the cheapest international city in the world. Panoramic ocean views for less than $1,000/sqft? Unheard of!

      Mortgage rates have actually declined by about 0.2% since the Fed raised rates in Dec 2015!

  26. Vistahermosa

    Sam- two other questions: 1) WHY are real estate commissions still at 5-6 percent in today’s environment? It’s absolutely baffling to me. 2) Why should a high income earner living in SF, NY, DC, or Boston invest in anything other than truly cash flowing properties in those cities assuming they are only looking for the highest return on their money and they dont care about being a LL? What is the arg for diversification under those circumstances. Rents are sticky on the downside exactly like u said.

    1. Dunno about number 1, my guess is because there isn’t a better cheaper alternative yet… I dont think online selling platforms would work as well for real estate auctions. Plus how do you organise viewings?
      For number 2 I would say that most folks need to leverage into real estate. This is based on credit and not everyone has access to credit.
      When things go bad its not just prices that fall. People lose their jobs, which means that the mortgage gets harder to service. Holding a non leveraged stock portfolio that has lost value is less stressful than trying to continually service a mortgage when you have become retrenched.
      In good times, leveraging is great. No one wants to talk about what happens in the bad times.

      1. The bad times were felt most acutely in one’s year end bonus, and stock holdings. I literally felt nothing with my SF real estate b/c I lived in one place like usual, and the rent in my other units were paid as usual. Where I did feel dismay was my Lake Property vacation property that took a tumble b/c nobody needs vacation properties during a downturn.

        I think every property owner should go on strike and never sell their property until the commission becomes fixed or goes down to a more reasonable 3% level (1% of buying agent, 2% for selling agent). I wrote my strike post years ago, and continue to remain on strike. Thank goodness, b/c I would be kicking myself if I sold between 2010-2012 as I was thinking of doing!

        1. Why do you think 1% / 2% are more fair than 6%? What if the use of a realtor increases sales price beyond 6% – isn’t the realtor worth it?

          1. Pretty easy really. If you can buy and sell yourself due to the internet and DocuSign, the price should be close to 0%. The higher the commission, the harder it is to do yourself.

            I’m happy to pay a RE agent a structured commission starting at 1%, if they can a higher sales price e.g. 1% and $1M, 2% at $1.1M, 5% at $1.5M. Now ask real estate agents to accept this highly logical proposal, and they will say no. Ask yourself why that is? Could it perhaps be that the market is so efficient that the market dictates the price, and not the RE agent as much anymore?

            Are you a real estate agent? If not, why are you for higher commission rates?

            1. How many real estate transactions have you been the seller for?

              Sounds like becoming a real estate agent might be your next try at a new industry. Only then might you understand the reason an agent declines the work for a lower commission.

              1. Feel free to share why you think a 5% selling commission is the right number. I’m always open to hearing the other side.

                You might very well compel me to start selling some real estate at 5% on the side too! thx

            2. Real estate agents are educated in their field just as accountants are trained in theirs. We follow the market and know HOW to price a home and when to list it. Do you pay an accountant to do your taxes a smaller fee because you COULD do it yourself? No, you pay them to do your taxes because you don’t have the knowledge, resources, or time. You get what you pay for.

              For example, on a $500,000 sale the total commission we would charge would be 6% totaling $30,000. The listing agent makes 3% or $15,000. We pay the agent that brings the buyer the other 3%. Often times, agents are not handed listings. We work hours for them. If there is a firm that hands out listings in exchange for no work, sign me up.

              Not to mention, that particular listing agent is taking a split and giving the other portion to the brokerage. Maybe even paying their assistants that do a portion of the transaction.

              On my team, we get 30% of that 3%. My brokerage then takes 21% off the top for royalties. If you do the math, that would leave me with approximately $3,555. I have not paid self-employment tax yet either. You don’t think that potentially 6 months of work is worth making $592 per month?

              I will admit that every individual that has their real estate license is not an expert in the field. However, that can be said for many fields that aren’t constantly berated on why they should charge less for their services.

              Real Estate Firms are designed to make a profit just like any other business. I actually created a spreadsheet that breaks down how much each one of our listings cost us. It’s $3,000 per listing. We primarily sell homes that range from $150,000 – $500,000 and that is a huge cost.

              If individuals were left to sell and buy homes on their own, there would be many lawsuits and unprotected buyers and sellers. Please do attempt to sell one of your many million dollar assets on your own and fill us in on how it goes.

              1. Kara,

                I do my taxes myself. I’ve done it for 10+ years using H&R Block’s software that costs under $60 a year. Before then, I paid $500 at most to do my taxes, which was way less than half a percentage of my income.

                I understand real estate agents provide value. You have your network, your pricing abilities, sales abilities, time, etc. I’m not saying you guys don’t deserve to get paid. But with the world going to a fee/flat fee model and commissions declining due to the internet, hanging on to a 5-6% commission is not sustainable. The internet has made buying, selling, searching for a home so much easier than 10-20 years ago! Do you not agree with this?

                Do you really think you deserve to earn a $100,000 commission on a $2 million house sale? That is absurd. If you are truly confident, all you’ve got to do is negotiate with the seller with staggered commission levels based on the selling price e.g. flat fee of $20,000 under $2M, $100,000 commission if sold for $2.1M, etc.

                The high commissions are ultimately hurting agents b/c turnover is much lower as a result.


            3. The general public confuses the real estate agent as their protector in the deal when what they don’t realize is that the TITLE COMPANY is the entity that provides the most protection from getting burned. Most (maybe all) states have standard contract forms and it is so easy to fill one out. Most title companies are more than happy to provide a quick review for you if they think it will result in more business for them. The folks at the title company are way more qualified than most RE agents to review a contract.

              Agents are simply gate keepers. The only value they add is their MLS network/data. Unfortunately, this is used more for their advantage than for the buyer or the seller. That’s why comps an agent shows their buyer are almost always inflated compared the the actual appraisal. The agent has a conflict of interest with their client, in my opinion. They don’t get paid if the deal doesn’t happen and its not like they are going to serve the same client many, many times – probably only once in most cases. So they really have no incentive to dissuade a bad deal as long as it is an executed deal.

              I’ve had agents send me tailored listings to my email and it was never anything I wasn’t able to find on Realtor dot com or any other similar site. In fact, the interface is usually worse.

              What’s worse is that most agents won’t work with you if you don’t have an agent yourself. They have their reasons, but mostly it’s a racket to protect their way of making a living. I don’t begrudge a group for organizing to increase/protect their wages – its really no different from a union in regards to a collective interest. It’s no different from other licensed professionals except that the requirements for RE licensing is a laughable joke compared to licensing requirements for an engineer, CPA, lawyer, doctor, etc. Agent licensing is slightly higher than food handling licensing, barber licensing, tax preparation licensing, etc.

              What I do is look up the property owner through the tax records and tell them I will work with them sans agent and split the different in the saved agent fee with them if the deal merits it. Not all home buyers/sellers are comfortable with this because they think the agent actually protects them from some scary fraud they can’t even imagine, but some will.

              Agents are mostly gatekeepers who are organized around a canny system and feed off the fear of the unknown from the unsophisticated buyer/seller. They do unlock the front door for you as long as the schedule is convenient for them….

      2. Great points indeed. When I downsized to my current house in 2014 it immediately felt WONDERFUL having a smaller mortgage and paying less property taxes. Meanwhile, it also felt good to finally crystallize the value of my previous home by renting it out.

        There’s something to be said by living well within your means.

        1. This is in reference too the realtors fees. How about more of a fixed price approach. In a sellers market is it really any harder to sell a property that is 500k vs 1.5 mil or more? It’s basically the same paperwork and the same amount of work in my opinion, especially when the market is going nuts to buy up property and you have multiple bids that are asking above the asking price.

        2. Terry Pratt

          Do you expect burger flippers to live well within their means? How might they accomplish that?

          1. It would depend on where they’re living, what their current expenses are, and how much their local burger flipping gig pays, but short answer – by living like a student.

            – Getting multiple roommates (or moving back home if that’s an option)
            – Getting used/free furniture on Craigslist
            – Taking the bus or driving an old beater
            – Eating lots of pasta/rice
            – Finding cheap (or free) entertainment
            – Studying to enter a higher paying occupation/working other gigs on the side. You gotta do what you gotta do to pay the bills, but burger flipping isn’t exactly a good long term wealth-building strategy.

          2. Terry, how long have you been flipping burgers? Depending on your duration, you might be eligible for a promotion and slowly move your way up. That’s what I did when I worked at McDonald’s.

    2. Why do you assume that 6% is not a fair number for a real estate commission? If you believe that is too high, why not negotiate for a lower rate.

      1. Maybe we are on to something. Well John Boglehead thought 5% load fees were not fair so he created vanguard to provide low cost no load fee index funds for a fraction of a percent yearly. Uber thought well 50 dollars for a cab ride is too much so they came up with a solution. We all know it’s not necessary to buy a used car from a dealer because of the added mark up and fees, therefore people buy from private listings over on Craigslist or similar. I’m sure a solution for lower cost fees in real estate transactions could be certainly a possibility or just simply shop around and doesn’t hurt to negotiate.

        1. The 5% front load fee is the BIGGEST RIPOFF in money management today. I hope nobody is falling for this. My friend was convinced to move her money to Edward Jones by this slick guy she met playing volleyball. He signed her up without her given explicit approval and charged her a 5% front load. I’m telling her to fight back and move her money elsewhere.

          5% fees should NOT happen in this day and age.

          1. I’ve met so many people who are with Edward jones, Ameriprise and other high cost firms. 99 percent of the time when I say “you must be paying some really high fees unnecessarily” they look at me like “what fees?”. A lot of people who are stuck in high fee mutual funds, don’t have a clue what they own, and don’t have a clue what they are really paying for. I do my best to direct them to such sources as the bogleheads, vanguard, wealth front, Betterment etc.

          2. Steve Adams

            Yep – I immediately classify any company that does this as a group of thieves. Any and all employees there are complicit in this theft and should be treated as such.

      2. I negotiate by simply not selling until rates go down. I’m on strike, and I’m glad I have been due to the rice in property prices since I first was thinking of selling in 2012.

    3. This is why I always recommend to get an ethnic newspaper (be it Spanish, Chinese, Korean, etc) and find a real estate agent from there.

      Not only do they take less commission, but they often will give you a kickback if you ask.

      Don’t worry about the language barrier, as they will always have someone that can speak English.

  27. Vistahermosa

    Sam- Im always impressed by the depth and quality of your analytical analysis in your posts, especially your real estate posts. You go right to the bottom of the ocean floor while virtually every other blog and book ive read simply splashes around on the surface. Are there any folks out there who you would recommend who also write in a sophisticated, thoughtful way on real estate? You seem to be the only game in town!!

  28. Vistahermosa

    Sam- i love your work. Ive learned so much from this site. Im 90-10 in real estate and would be 100-0, but my firm makes me have a 401k plan and pension fund. My return on those things since I started in June 2000 is approx 2 percent. Meanwhile real estate is through the roof and rents are through the roof (on the coasts) and the interest rates are low and I agree with you, will be historically low for the foreseeable future. I never understood the arg for diversification between property and stocks if you live in one of these forever strong rental real estate markets like SF, DC, NY, Boston. If you live in of those places, you should try to buy as many properties as the bank and ur income will allow and make them generously cash flowing (after mort, taxes, insurance, expenses, vacancy factor). You get significant passive income, and u have something tangible- not like funny money as you like to call it. If u get appreciation or depreciation, who cares as long as the rents are solid. Thoughts? Also- why on god’s green earth are real estate commissions still at 5 or 6 percent Given redfin and these other great real estate web sites? Its absolutely mystifying to me.

    1. I’ve always tried to buy property where I believed I could increase my lifestyle. For example, my first place was a 2/2 condo overlooking the park in Pacific Heights, a nice neighborhood from renting a crappy 1/1 first floor unit with tandem parking.

      My latest residence, purchased in early 2014, is a cozy SFH that has two levels of panoramic views of the ocean and nightly sunset. It’s a dream come true, and I’m adding other things I’ve always wanted (luxury master bathroom, deck off master bedroom, open kitchen, sanctuary, etc). It’s farther from the madding crowd, and much cheaper than my previous residence.

      Property is awesome because it provides utility first PLUS a potential to see capital gains and rental income in the future. I think we should all enjoy our money. Otherwise, what’s the point?

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