Rotten Apples

When I was quite young my father taught me a principal that I would now like to present to my readers. “What is the value of a rotten apple?”, he would ask. The puzzlement of my lurid imagination would often take the conversation way off track. But through his patient, instructive way he would gently push and pull me back on track to properly evaluate the question.

If you consider for a moment that a rotten apple attracts bugs or worms then perhaps you could account for the possibility of selling these critters as bait; however, this certainly can not be the answer. There is a certain oder to the rotting fruit that will also detract from its appeal.

It cannot be eaten or sold, the colorants may be useful in the making of dyes, but certainly not to the extent of other more vibrant fruits. “So what is the value of a rotten apple?” I would finally ask.

The answer of course is that to wrong person, a person without the ability to look into the future, a person without basic understanding, or a person who lacks time and patience, this fruit is worthless.

However, to someone who understands the nature of fruit, who has forethought and the ability to see beyond the now, a rotten apple can be worth quite a bit. The fruit itself is useless, but it has seeds. Its seeds can be cultivated and grown into a successful orchard and over time this worth can far exceed even the most ambitious expectations for an experienced investor.

So what does this have to do with real estate appraisal? Perhaps nothing, or perhaps it helps us to understand that even the most useless property has value as long as we take the time to understand the nature of the property, its location, and its potential highest and best use which, with the proper diligence, can recognize value for future generations.

Of course this may be more applicable to real estate investors, than real estate appraisers; however, in this economy I believe it is time for appraisers to put their knowledge to work and begin to plan for their futures by purchasing and managing properties for themselves. Of course and of course, I am in no way suggesting an appraiser buy something that he has appraised. This would be completely unethical and someone who does this should go to jail.

What I am suggesting is that appraisers pay attention while they conduct research, and target properties that are good investments. Put to use the knowledge that each of us has acquired and begin to profit from our skills instead of only telling others what something is worth.

This is my two cents for today! Now go and find a few “rotten apples“!  With the right management and care, who knows what kinds of  “orchards” your future generations can enjoy.

See you around the water cooler!!

Uncle Zev

Fear of the unknown.

My father taught me that one of man’s biggest challenges in life is learning to kick the FUD out of it. That is to say fear, uncertainty and doubt. While fear can save the young from devastating mistakes it is also the leading cause for failure in business and in life. We often fail because we do not try. Fear is currently driving many real estate markets in and around the country. I was speaking with a charming lady, I will call her Silvia. Silvia recently turned 67,  she has outlived her husband and has three adult children. She has paid off her car, and two of her children’s cars and is three payments away from paying off her house.

Her youngest daughter, who is in her forties, has asked mom for help purchasing a home so that she and her two children can move out of a very small and dangerous apartment complex and enjoy the relative security of a home of their own. When Silvia found out what I do for a living she immediately began to tell me her concerns and fears about buying a home for her daughter in this current economy. She told me she was really afraid that her daughter would end up owning a home that would lose value and that lenders might sell the note and who knows what would happen then.

I spent some time with Silvia telling her that while her fears were certainly understandable, there was more to be considered than the current economic madness. Real estate is one investment that if handled wisely, will continue to perform. I told her that the uncertainty in the marketplace were of course valid concerns, but that we should not throw out the baby with the bath water, so to speak. People have to remember that common sense continues to work even in a bad economy. Unemployment is high and under employment is higher. Market prices are being pressured by the continuation of REO homes that will be marketed over the next several months. According to the latest report, foreclosure modifications are on the rise, however, the looming 2.5 million homes to be foreclosed is still on the horizon and will be affecting neighborhoods all over the nation. Therefore, it is not time to aggressively bid up sale prices or take out mortgages that exceed 80% of the market value.

What consumers should be asking is, what is the potential income to this property that I am considering. Can I rent the home to someone else should my job situation change? Would a potential investor be interested in this home, i.e. would the property cash flow?

People still need housing and the demand for rental properties will continue to remain strong. So for those people who have good credit or mattress money that needs to be invested, real estate is still an investment that will continue to perform and, as the markets improve, the equity position will also improve.

Remember FUD is not a new concept that was created by chatterers or the cyber world. Because of FUD the masses continue to rent from those of us who have kicked the FUD out of life and replaced it with common sense.

See you around the water cooler!

Uncle Zev

New Rules or Foundational Concepts??

I just read a fascinating article regarding 5 New Rules of Real Estate. The author made some interesting points in the post, and I believe, accomplished the overall goal of inspiring a solid response. The responses are quite telling, because there seems to be an overall consensus that people are afraid of real estate.

The reality, as discussed in one of my previous blogs Opportunities Abound, is that the rules of investing are not new at all. In fact it is now that the foundational concepts of supply and demand, market motivations, and market rent versus property expenses must come into play.

Supply and demand we all understand. When the supply exceeds the demand (as it does today) buyers are placed into the driver’s seat and as long as no one is looking for a quick flip they are unlikely to get hurt at today’s prices. But the real question is not a question of value. The real question is one of financing. If someone needs to borrow money to purchase a property, they are placing themselves at risk. This factor of risk was always the case, but generally, consumers ignored this risk with the assumption that the lender is the one putting up the money and the one who would suffer the loss. The real loss is that when the consumer loses their home, their creditability and esteem, the price of this foreclosure is often more than the typical borrower can bear.

The more equity a buyer can establish when purchasing the property, the better. This statement is so very obvious and yet it is amazing how many people did not seem to understand this concept. Of course the gurus will tell you to leverage your money, by carrying a higher loan to value ratio you can hold on your cash and keep it liquid; however, anyone who followed this advice has found themselves in a world of hurt at this time.

Market motivations of course refers to the reasons that potential buyers are attracted to a particular property type or location. When a property has a particularly attractive location because of its school district, or its wealth rating, or its positive economic influences, this property will generally sell before homes without these attractions. Understanding potential purchasers and their motivations will help a buyer or investor to set a price when they purchase the home.

The concept of income analysis can become quite complex and should not be taken lightly. An experienced real estate appraiser would make an excellent advisor, as would a real estate broker or property manager. The basic idea is that the debt service of the property (i.e. mortgage + taxes + upkeep + vacancy and collection loss + management costs) should be equal to or less than the market rent a property can earn. If the market rent will not support the expenses related to the property a home owner is thinking of purchasing, then their option of renting out this home, should they lose their job, has been removed from them.

Bottom line, real estate like any other investment, needs to have a very clear purchase price that takes into account the factors noted above and a very clear exit strategy. Most people make the mistake of investing without an exit strategy and the purchase price only takes into account the competing properties without considering debt service, or market rent.

In short, now is a great time to buy property as long as the buyers do not lose their common sense along the way. A real estate purchase is not about emotion or pride, it is very much about logic and gain. KISS – Keep It Simple Stupid my father used to say (not an original saying), but this method works in life and in investing as well.

See you around the water cooler!