Patrick Eng
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Week 2 - Everything I Needed to Know About Buying, Selling, and Investing in American Real Estate

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Here is Week 2 of the 52 Week series in my 2018 Year of Learning. In this week, I cover 6 articles I consumed concerning buying, selling, and investing in American real estate.

Many of the keywords and topics brought up here could have blog posts of their own due to the amount of information on each. But in order to not make this the size of a dissertation, I won't go into too many specifics.

Come back next week to see what I learned about Personal Financing as a 20-Something.

Hobby vs. Profession

Apparently, there is an idea floating around that being a realtor is just a hobby and can be used as a way to pick up some cash on the side. From what I understand about hobbies, and from what I've learned in this guide about being an agent, real estate is clearly not something to do for fun. It is demanding professionally and can have serious ramifications if you mess up one sale since there is both a lot of money at stake and people's livelihood.

Leads vs. Listings

When it comes to being a real estate agent, there are two sides to the sales process:

  1. You work with homeowners to list their properties

  2. You match buyers with either your own listings or someone else's

You basically need to play for both teams by feeding your leads into your listings. It doesn't make sense to just stick with one. Real estate is different from other products and services in that it is not normally a repeat purchase.

When you buy a house, it generally means that you plan to stay there for a number of years, with the average American moving around 11 times in their lifetime. Because of this buying pattern, real estate agents need to utilize both the buyer and the seller if they want to be successful.

Relationships - Personal vs. Professional

For those who have either bought a house or are just familiar with the housing market, the classic saying is "location, location, location". What this highly complicated phrase is trying to say is that where you are looking to buy will affect everything else.

How does this affect relationships though? Well, it's pretty simple. Buyers want to know that the agent they are using is familiar and involved in the area that they are marketing for. If the agent is personally invested in that location, it sends a subliminal message to the buyer that this area must be pretty good (at least to some degree).

As an agent, you need to keep your relationship with buyers and sellers professional. But that does not mean they can't also be personal. An agent's greatest asset in future sales is his or her's past sales. Word of mouth is still one of the most highly valued at 88% of people placing the highest level of trust in word of mouth recommendations. Leveraging and sustaining these relationships can give you a large reward down the road. All you have to do is maintain the trust created in your past sales relationships.

Be Real

As a real estate agent, you're dealing with people (something I'm not too experienced with as an IT manager). And when it comes to selling to people, there needs to be trust. Trust happens between two parties when there is authenticity. So be authentic with your clients and find a way to connect with them.

Get Ready to Work Your Ass Off

Again, when dealing with people, a sale or call could happen at any moment. Like a doctor, midwife, repairman, etc, you as a real estate agent are always "on-call". Be ready to work at the drop of a hat if the client is suddenly ready to make the buy at an odd day/hour. You can't be a successful real estate agent (or anything for that matter) without putting in a good amount of blood, sweat, and tears.

Record, Analyze, Adapt

You'll never find a cookie-cutter mold that will guarantee a sale or lead. While there are best practices that can help you point in a successful direction, it is up to you to record each sale from beginning to end, analyze it and then adapt your strategy based on what went well and what failed.

Don't be a Luddite

As an IT major in college, technology has always been a core aspect of my life. It is so ingrained in my life (and in society in general), that not using certain technology at your company is only hurting you.

As a real estate agent, you can't fall behind your leads and clients when it comes to using that tech, from social media to virtual tours. Get familiar with it and use it yourself, since most of your clients are (should be) on various social media platforms and house listing sites. The tech industry changes fast, so be prepared to adapt quickly.

Do Market Research

Your market research should cover these two topics:

  1. Who is the average buyer (student, working professional making $X per year, low-income families, etc.)?

  2. What are the trends of the physical location (high-density population, cheap housing, excellent public transportation)?

These two aspects of your research will help you understand your buyer and how the area impacts their buying decision.

Seek Help

Someone will always be better than you at what you do. I'm not saying this to discourage you, but to encourage you to keep reaching higher. Seeking help is a sign of wisdom, and in any profession, there are people who know some part of it better than you do. In real estate, look to other agents working in similar areas and ask their advice. Not only could it help your business, but it tells the agent that you see them as an expert. Caress that ego and then squeeze them like an overripe lemon.

Lone wolf vs. Member of the Pack

As a real estate agent, you have two options in how you want to structure your business:

  1. Run it by yourself

  2. Join an agency

You could go out and get your broker's license and then run your whole business independently. While this can be a good way to go, many agents end up working at an agency instead.

Joining an agency can be risky though, and should only be done after thorough research, ranging from membership fees to the reputation of that agency in the local market. Talk with local independent agents and those in an agency, and make your decision based on your research.

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The Price is Right…?

Study price trends in your area so you understand what areas are in high and low demand. Gathering the necessary data that shows current prices for the homes in your target area tells you whether it's worth investing in or not. A service like Zillow can give you a quick estimate on how much homes are going for in your target area. Or, just be like the people on House Hunters.

 
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Mortgage Pre-Approval

Unless you have enough dough to start your own Panera, you'll probably have to take out a loan to purchase a house. This is where a mortgage pre-approval comes into play (which is different from a pre-qualification). The main point to understand when it comes to pre-approval is that by submitting certain documents to a lender, you speed up your loan approval process down the road.

So, before you go house hunting, make sure you get mortgage pre-approval so you're better prepared to find your dream home.

Look for Signs of Growth

Be like Bob the Builder and see the value in new construction projects. A good sign to look for when buying real estate is how investments are being made in the surrounding infrastructure. Look for construction of apartments, stores, town centers, roads, traffic lights, and anything else that provides value to a community. Don't invest in an area that is only maintaining itself, since there will be no reward there for you.

Property Tax

When looking for that perfect community, look at their county property taxes first. You don't want to be in a situation where you find a great house but then realize you have to sell all your bitcoin just to pay the taxes. Talk with your agent and find out what the property tax situation is, and while new developments in a community can be a good sign, they can also be a warning. Since with all this new construction, someone has to pay for it.

Too Cool for School

Except not at all. Since I am not a parent (and have never bought a house), I can't talk about my personal experience in buying a house based on its proximity to a well-performing school. I do know, however, from conversations with my own parents and other parental homeowners that their house's location to a good school was of critical importance.

Parents want their children to have a good education, so when buying a house, see what schools are in the area. I feel like that's pretty obvious, but so was the end result of H&M's sweatshirt marketing efforts but they still went through with it.

Live Life on the Edge

Life in the city can be expensive and busy. When you can't find a suitable location in the heart of the city, start looking at the shoulders instead. Houses near the edge of popular communities can still be valuable pieces of land, especially if they are near some sort of public transportation (bus, metro, train, bike share, etc.). Even though you aren't on the main stage, there is still a lot of value being near a good way to get there.

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Buyer’s Agent vs. Listing Agent

Similar to what I mentioned in the first article, there are listings and leads (buyers). In that article, I referenced how you can be both as the agent. Well, now looking at it through the buyer's eyes, make sure your agent is NEVER both (because conflict-of-interest).

Fixed Rate vs. Adjustable Rate Mortgages (ARM's)

As the names imply, these mortgages have either fixed interest rates (let's say for 30 years), or have adjustable rates. While that ARM could give you lower monthly payments, your rates are susceptible to the changes in the market. Depending on how long you plan on owning that house, you will decide between a fixed or adjustable mortgage. Long-term ownership? Go fixed rate. Otherwise, look into an adjustable rate mortgage.

Pre-approval Letter

I'm starting to pick up on a theme here. Pre-approval seems to be a unanimous suggestion. Get concrete approval from your bank about how much they can lend you, and use that to make the best buying decision you can. When getting that letter, make sure you are clear are what fees are involved, closing costs, and locking in your interest rate.

Scrutinize and know your credit score and see if they are options for improving it, such as explaining why payments were late, delinquent, etc. Sometimes, a simple explanation can improve your credit score.

Also, Redfin states that agents like to deal with local lenders, so give that a shot.  

Listings

Listings are just another word for "houses for sale." Doesn't get much simpler than that.

Author's Note: if you want to learn more about homes for sale by the owners, go here. I am not able to incorporate that section into this post due to the length that it would come to. I'll be merciful.

Inspection

Hiring an inspector to come to a house to look at every part of the house might cost a good chunk of change up front, but could save a mountain of cash later. It is their job to review all the capabilities and safety measures of the house and state whether it is "livable" or not. When an inspector misses something initially, it could be a costly mistake later. And if he/she does find an issue, use that as leverage to reduce the price.

Appraisal

When it comes to house appraisal, there are two sides to the story. First, as the buyer, you want an accurate appraisal because you want to pay a fair price for the house. Plus, if the appraisal is lower than the stated value, the bank could reject your loan. As the seller, you want an accurate appraisal because you want to make sure your house has a competitive chance when it comes to nearby listings.

Contingencies

These are just certain conditions that must be met before the deal can actually go through. A few examples include:

  • financing contingency - you get the loan

  • inspection contingency - the house is livable

  • appraisal contingency - its appraisal was close to its stated value

Offers and Contracts

When you make an offer on the home, the seller might push back with a counter. Usually, because they want more money, someone else is looking at buying the house, or they want to hurry it along faster. When this happens, work with your agent to negotiate a fair deal.

Closing Costs

This is what you pay when you purchase your home. Congratulations, you're a homeowner! Now, pay 2 - 5% of the price of the house as a fee, on top of the down payment, HOA fees, and insurance. Here is how you can lower your closing costs.

Title Insurance

Title insurance is a way to verify that the person selling you the house actually had the right to sell it and that it didn't have any hidden debts incurred by the original owner.

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Turns out, you can buy a house in just seven easy steps. And when I say seven, I really mean just seven that are a conglomeration of 500 other steps that get bundled or implied into others. And when I say easy, I mean very complicated and meticulous steps that have 101 ways for each one to go wrong.

But seven easy steps sound easier and less scary, so let's stick with that.

1. Save for the Down Payment

Not saving up enough money to pay for the down payment and other expenses before you go house hunting is only increasing your chances of being disappointed later when you learn that you can't afford the house.

Since buying a house is most likely the biggest purchase you'll make in your entire life, you want to make sure that you do it right. Otherwise, you'll be stuck living with a headache for many years to come.

So, there are two questions to answer as you ponder this and learn about how poor you really are:

  1. Are you financially mature enough to buy a house?

  2. How much should you save for the down payment, closing costs, etc?

The answer to number one is as simple as making sure you've paid off any outstanding debts and that you have a healthy cushion in your emergency fund, let's say 6 months’ worth of expenses.

As a student, my mind immediately goes to student debt. And with the average borrower having a little over $37k in debt, that should be pretty easy, right? Please note the painfully sarcastic tone of writing as I currently try to save my back from being crushed by the weight of my debt.

The answer to number two will vary, but a good number to shoot for is between 10 to 20 percent for the down payment and then three percent for closing costs.

In case this wasn't clear, the percentages are calculated against the price of the house. So, a 20 percent down payment on a $250k home would be $50k and then the closing costs would be $7.5k, totaling $57.5k for the expenses needed to be paid after you close on the home.

Plus, don't forget about moving expenses, furniture purchases and miscellaneous renovations once you move in. And you thought a car was a money-sink…

2. Get Pre-approved for a Mortgage

As I've referenced in the previous articles, everyone seems to agree that getting pre-approved makes sense, and not doing it is just shooting yourself in the foot. Obviously, it's a little more upfront work, but it is meant to help you later on.

Paying with cash and not taking out a mortgage loan is a better way to get your dream home, but most of us don't have $50k hidden in our mattresses.

In this article, Dave Ramsey (the author) suggests three different types of loan plans:

  1. A Fixed Rate Loan: with this, the interest rate on your loan is fixed which saves you from any rises rates.

  2. A 15-Year Term: a plan that has higher monthly payments, but also means your mortgage is paid off sooner.

  3. Monthly Payments ≤ 25% of your Net Pay

Figure out how much you can afford to pay each month and stick with it. Buying and owning a house is like the Tough Mudder, it's not about what place you finish, it's just about finishing.

While it may be nice to have the mortgage paid off sooner, in the end, you just want to make sure that you are financially sound enough to pay it off.

3. Find an Agent

Agents are there to guide you through the house searching, bidding, and closing processes. Again, since this is probably the biggest purchase you'll make in your life, besides maybe sending two kids to college for four years, you want to do it right.

Find a handful of agents and grill them on their past experiences and current knowledge of the market. If they get flustered by your questions, drop them like NBC dropped Matt Lauer.

4. Go House Hunting

This is the part that everyone thinks about when buying a house, and tend to forget about the first three steps.

There is an unholy number of variables to factor in when finding the perfect home, so make sure you write down what you need and want you want, and make sure your agent has access to that list. More likely than not, you'll have to compromise on a few items, but there are a few key features of the house you should keep in mind.

  1. Location and Layout - there are two factors that tend to not change when you buy the house. Sure, you could pick up the house and move it, or completely renovate the inside, but you most likely won't. So, find a great location and layout and try your hardest to not compromise on these parts.

  2. Don't get thrown off by easy-to-fix paint jobs. If other potential bidders aren't biting because the bedroom is neon pink, realize that a simple paint job can cover a multitude of sins.

  3. A cheap house in a good neighborhood > an expensive house in the same neighborhood. The reason? A better future value for our house.

  4. Pay attention to the local community and other listings in that area. You don't want to buy a home in an area that is struggling to be relevant.

  5. Local schools matter, even if you're not a parent or planning to become one. Homes in close proximity to well-performing schools inherently have higher values.

Don't freak out if you're house search is taking a little longer than expected. On average, buyers spend 10 weeks looking for their home, so just make sure you're being smart in your decision.

5. Submit Your Offer

Now that you've found your dream home, it's time to make an offer. In most cases, you'll be competing against other buyers, so make sure you have your finances and timeline in order so you can make the best offer that appeals to the seller. Rely on your agent to help you make the best offer you can.

6. Get a Home Inspection and Appraisal

Once you’re under contract, you begin the inspection process, and no, I don't mean just walking through the house again looking for scratches on the wood floors. This inspection process means hiring a professional to come to the house and make sure it satisfies certain safety and living regulations.

You should also get the house appraised, which ensures that you aren't paying more money than what the house is actually worth. This also helps the final mortgage approval since the bank doesn't want to lend out money for a house that is only worth $175k and not $250k.

7. Close

Now that you can see the light at the end of the tunnel, it's time to bring out the pen and paper and sign your name more times than you probably have in your entire life. Once you dot your i's and cross your t's, you'll also have to pay for any closing costs, fees, and expenses. Make sure none of this comes as a surprise, so talk to your agent about any confusing parts.

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Investing in real estate, in a loose sense of the word, can range from putting your house on Airbnb to purchasing real estate investment trusts (REIT). It's also a great way to diversify your investment portfolio and bring in some additional income.

Author's Note / Shameless Plug: this article and the next one deal with personal financing with a real estate perspective. Next week I will learn and talk more about personal financing in general. I use Wealthfront to manage my own finances, and if you sign up with this link, you can get your first $15,000 managed for free.

Real Estate Investment Trusts

Purchasing REITs are essentially letting you invest in real estate without any physical real estate. That might sound a little confusing and sketchy, so let's break it down really quick.

REITs are like stocks that you buy in a company, but these companies are ones that own commercial real estate and generate an income though that ownership. As an owner stock in that company, you get paid money, called dividends, which you can then put back (re-invest) into that company.

Online Real Estate Platforms

If you have a significant amount of money to invest, you can look into platforms like Prosper or Lending Club which connect investors and real estate developers. In exchange for financing various real estate projects and taking on the risk, you (theoretically) receive distributions at a specific rate.

This is a classic case of spending money to make money.

Rental Properties

Buying a good-sized house and then renting out any extra rooms is a great way to both help pay for expenses and make some extra money. This is called househacking, and there's no shame in living in the house that you are also renting out to other people and is actually very smart.

Or, you could go the traditional route and purchase or not sell your house when you move, and just rent it out for more than it costs to keep it, plus some.

House Flipping

If you've ever been a fan of Property Brothers or Fixer Upper than you should be familiar with this methodology. Flipping a house is essentially where you buy a relatively cheap house, usually because it's in bad condition or just plain ugly and no one wants it, and then completely renovate it.

This can be a pretty risky strategy since you not only have to buy the house, put all the money in to fix it, but then also sell the entire thing quick enough where you're not just breaking even. Plus, when you are renovating, you need to make sure all the estimates are accurate. Doing this well requires an intimate understanding of both the housing market and general construction.

Airbnb

Probably the easiest and least commitment needed method is to just rent out your house on Airbnb. Let's say you own a beach house or are going out of town for a few weeks, you can put your house on Airbnb and have strangers come stay in it.

Obviously, letting strangers into your home for a period of time can be a little scary and dangerous. So, as a little comfort, Airbnb does provide host insurance for up to $1 million. Make sure you read the details though on it and understand when you are covered and when you're not.

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If you couldn't tell from the title, this article is looking at 2018 and how the housing market is expected to change. You don't really need a Delorean though to say that it's going to be a good and bad year for the housing market.

The main takeaway? More single-family homes are going to be built, but their prices and monthly mortgage rates will increase.

But, as Shang says, let's get down to business.

Home Prices will Rise, But Not as Quickly as 2017

For the past two years or so, home prices have been increasing by around six percent. This is expected to drop down to around four percent in 2018. The reason apparently being that more single-family homes are expected to be constructed.

I don't fully understand why making more single-family homes reduces the rate at which houses are increasing in value, but I guess I'll just trust the experts on this one.

More Homes will be on the Market

Inventory has been in a bind for a while now, with not enough homes being listed.

This shortage stems from the baby boomer generation keeping their houses and not downsizing, investors making tons of money on real estate they already own and don't need to sell, and construction companies leaning more towards building expensive homes because they make more profit that way.

Danielle Hale, chief economist for Realtor.com predicts that there will be a growth in inventory in the fall of 2018.

More Homes will be Sold

Sales of both existing homes and new homes are expected to rise 2.5% and 7% respectively. This appears to be mostly in Southern and Mid-Western states where there is more vacant land to build on and less regulation.

Mortgage Rates will Rise

While mortgage rates in 2018 are expected to rise, you can just as accurately predict what the price of bitcoin will be in a month. According to CoreLogic, a 30-Year Fixed Rate will be around 4.7% (in November 2017 it was 4.07%).

Home Affordability Drops

With both housing prices and mortgages on the rise, home affordability concurrently drops. According to one analysis though (must be a great sample size), this increase shouldn't impact middle-class families too heavily.

Increase in Equity

As home values keep rising, equity rises with it. This increase in home equity could possibly correlate to an increase in home equity lines of credit (HELOC). If you're like me, you've never heard of a HELOC before, so let's just give a brief summary.

A HELOC is basically like having another credit card, though this one is used for large expenses. Taking out a HELOC you are borrowing against the equity of your home, meaning your house is now collateral. Note, in order to qualify for a HELOC, the "amount you owe on your home must be less than the value of your home." Information is taken from Bank of America.

Increase in Scams

This is nothing new, but be wary of any emails you receive that request wire transfers or any sort of money. This is usually a scam, and contact your agent to verify it.

Credit Problems? No Worries

There is going to be an increase in non-traditional lending or non-QM mortgages. This is targeted specifically at people or families who have had some prior financial issues and are trying to get back in the game.

Automated Lending

Automation is the name of the game. More mortgage lenders are expected to pour more resources into automated lending procedures.

Tax Reform

As I haven't read too much into the specifics of the newly passed tax reform, the best I can say (and when I say "I", I really mean Business Insider) is that home values will either stall or decrease by around four percent. It also seems to mostly impact New Jersey and New York homeowners.

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Well, if you came down here from the table of contents, then welcome to the ultra-compressed version of the post.

To be a real estate agent, make sure you satisfy the following:

  • It's a profession, not a hobby. If you disagree, you should go home and rethink your life.

  • Understand leads and listings (and how you use both).

  • Keep relationships both professional and personal. The personal side builds trust, which helps you close the deal.

  • Record each sale from beginning to end, analyze it, and then adapt your strategy based on what you learned from your prior mistakes or successes.

  • Do your market research, from nearby schools to building permits. Know the area and the resources being poured into it.

When buying a house, make sure you check all these boxes:

  • Saved up enough money for the down payment along with an emergency fund - 6 months worth of expenses.

  • Get pre-approved for a mortgage - more work upfront, but worth it in the end.

  • Find an agent - make sure they aren't playing both buyer and seller.

  • Go house hunting - focus on location and layout, don't get scared away by a bad paint job.

  • Submit your offer - work with your agent to submit a flexible and attractive offer.

  • Get the home inspected and appraised - makes sure you're paying an accurate amount and ensures the house satisfies regulations. If the inspection finds an issue, use that to bring down the price of the house.

  • Close - costs, fees, insurance, etc.

And there you have it, everything I learned in a week after researching buying, selling, and investing in real estate. I by no means consider this an exhaustive study and know that there are many more factors that play a role in this market.

Even so, I hope you enjoyed reading this post and that you learned something new. Come back next week to learn about Personal Financing as a 20-something.

And if you do decide to manage your money with Wealthfront, make sure to use this link (it's literally there to help you manage more money for free).

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Patrick Eng