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Questions

Did the Corona Zombie Virus change the market or was it just the Black Swan?

What were the market characteristics before the Black Swan?

Would the market have pulled back looking for any excuse? Any black swan?

What will the real estate market look like going forward?  How will home buyers and seller act or react? How will real estate investors act?

And how does that change prices?

Who are the winners and losers?

First we should identify the players … you know most of them.

·      Buyers and sellers

·      Lenders and appraisers

·      Wholesalers or flippers

·      The appraisal districts and property tax consultants

·      Online service providers including internet buyers.

Buyers and sellers

The real estate market of buyers and seller is a mirror of stock market prices and chart graphs….. but you can not see it plotted on a chart.

Real Estate is too variegated with odd irregular transactions making it hard to plot on paper.

Real estate investments are like shares of companies. There is good management or sometimes bad management with bankruptcies.

Good management is proactive and creative. Bad management is a passive spectator.

Some owners should sell to redeploy assets into other investments which they can better manage. Some people should not own real estate.  Some owners have a change of lifestyle and are ready to sell.

Buyers of investment real estate were accepting and signing purchase contracts based on promises and hope and expectations.  Sellers sold by offering expectations and hope of future increasing revenues and profits. Offering descriptions and memorandums showed proforma higher rents and good occupancy for 2 years in the future.

The Broker of a seller said that …. If you promise to be a good buyer with good management, this will be a good property for you to buy ….. if you realize the forecast of future higher rents and if you make the changes necessary to the improve the property and financial results.

The future may show that buyers will require purchase properties to have actual historical revenues and profits and not just future hope and expectations. A big argument is Capitalization Rate, know as Cap rate.

It is the reciprocal of Price Earnings Ratio, which is most often referred to when discussing corporate shares and the stock market.

% Cap rate is the reverse math of earnings multiple. You divided earnings by the % cap rate to get the value.   Sellers argue lower % cap rate which is a higher earnings multiple.  The Cap Rate % rate variable is affected by the competing interest rates of treasure notes and bonds and mortgages and also bank loan rates.

We can argue if the Federal Reserve creates the interest rates … OR  if it follows the market of rates.

Nevertheless …. The argument of rates and multiples will continue between buyers and seller and between lender institutions. That is the market.

The challenge may be ….. that sellers have expectations also. If you want and hope for a sales price of your home that is not realistic, that will not be supported by a licensed appraiser …… you the seller may have to come to a realization ….. several times.  This takes time and some sellers take longer to deal with these emotional decisions. This is why some homes sell in one week and other homes sell in 18 months.  Sometimes sellers believe they are smarter than their agent/broker. Some sellers have not owned the property long enough to build equity.  The seller can not afford to sell at a loss and can not accept foreclosure … until they must. Sometimes the seller waits several years to sell, with hopes that a good bull market will bail them out.  Waiting will help build equity as the monthly loan payoff decreases and thus the equity increases. Unfortunately those sellers usually do not make much effort for good management. They are do not have creative management projects to spend a nickel and make a dime.

Some people might be better suited to be passive investors with partners having better management skills.

Lenders and Appraisers – might slow down slightly if there is less speculation and fewer hot deals.

 Wholesalers and flippers

There are thousands of flippers in Houston and Texas …. Looking for a good deal. They have pushed up home prices by competing for homes for sale which are advertised as bankruptcy sales.  Thus not such a good deal as we hear advertised. Lender owners of bankruptcy sales have become more sophisticated marketing to the thousands of flippers and remodelers.

A poker buddy of mine has stopped flipping because the margins are too small. So now he is a responsible remodeling contractor.

For several years they have gone to seminars sponsored by private hard money lenders wanting to lend at high rates.  I recently helped a friend buy a remodeled home for $420,000 …. from a flipper from California. The home had flooded for the first time and had been stripped to the studs. I spoke with the remodel contractor and learned how much the California flipper had spent.

I figured with materials and labor and lender expenses and brokerage fees …. The flipper lost approximately $50,000.

Wholesalers – Not sure why they are called wholesalers. They do not sell for wholesale … they sell for high retail. They have been very active the past year

One Saturday morning, I saw Superman, Actor Dean Cain, as the spokesperson to get me to attend a seminar about “How to get Rich by wholesaling real estate”…… Without a large investment.

Wholesalers often sign a contract to buy at a price very attractive to a seller. In my opinion, the wholesalers are looking hard for deals and are not buying at wholesale.  Often the seller is surprised to get that high price.

The wholesaler is wanting to put any property under contract with a long option feasibility period.

The wholesaler thinks it is a good low price or thinks that he can find a greater fool, a bag holder. Then the wholesale assigns the contract to a buyer at a higher price and take a slice at closing, when the new buyer performs on the assigned contract. Frequently, upon an assigned contract to new buyer, the upfront money goes “Hard” and is not refundable to the new buyer. The upfront hard earnest money goes to the wholesaler, even if the new  buyer does not close the deal of the assigned contract to buy the property,  which can be for several reasons.

Now … It may be more difficult to get buyers to be the “Greater Fool”.

On my website, I have a compete podcast about wholesalers.

Appraisal Districts and property tax consultants and registered Arbitrators

I am licensed by Texas as a Senior Property Tax Consultant and have had a license since 1990. (when I was ten years old).

I also became registered as a Texas Arbitrator, to hear arguments of both the owner/tax payer and from the representative appraiser of the Appraisal district.  Registered arbitrators are GOD. Their decision can not be overturned.  The state of Texas this year says I can not be both property tax consultant and also a Registered Arbitrator.  I dropped my registration.

My father was Vice Chairman of the Appraisal Review Board that listens to the concerns of owners and their hired property tax consultants …. When they argue to reduce the taxable value.

In year 1980, when the price of oil dropped from $40 to $10, he jumped to the other side of the table to become a tax consultant and get paid a % of taxes saved by his property owners.

This year the price of oil has dropped from $65 to $27 per barrel.

Maybe, the buyers who bought commercial investment real estate will not be good managers or will not be able to get the advertised proforma rents which were advertised.

Maybe some tax consultants can get the appraisal district to reduce the taxable value.  Last year however, many investment properties were valued at 50% to 70% of the actual sales price.

The appraisal district goes to the court house to discover the amount of the loan and thus can guess at the sales price last month.

If the property was listed on the MLS, the actual price is known to the appraisal district because they are a subscriber to the MLS.

On commercial properties, the appraisal district buys the sales prices from Loopnet and Costar….. if the seller’s broker tells Loopnet the final sales price.    Before you buy a property, talk to me about how to prevent this mistake and how to save money years after you buy a property..

Internet i-Buyers

They buy your home with little due diligence investigation. They do online desktop appraisals. They do not hire a licensed building inspector and may close the deal in ten days.  The price may not be your highest possible price, but they offer convenience.

Maybe you have seen the TV ads for Offer Pad .com.

Zillow Offer will also buy your home.

They expect to make a small profit (maybe 3 %) …..  but turn their money over 12 times per year. They are have Billions lines of credit at big banks and are heavily leveraged with debt to the banks.

So if prices stop going up or if prices drop 2%, they lose billions due to their heavy debt leverage.

During the Zombie virus scare, their stock dropped 65% in one month.

Coincidently, I help some multifamily investors to lease their apartment units for a $100 fee.  The MLS data propagates to Zillow and half of the inquiries from prospective tenants are bogus.

As a Senior Property Tax Consultant and a Registered Arbitrator and licensed broker of Commercial and Residential properties for 26 years ….. Maybe I know everything …. But every day I see something different and new.

My most difficult challenge and pleasure is helping real estate owners …. NEXT.