More Gloom Than Doom: Commercial Real Estate

In a general review article this morning by Dees Stribling in www.commercialpropertynews.com, the headline is "Economic Update - Commercial RE on the Edge?" That's a bit, well more than a bit, hyperbolic, particularly from a Texas vantage point.

There is much handwringing in the financial press about the near future of commercial real estate, which so far has fared okay compared to the residential sector. Notes Stribling:

The idea that commercial real estate might be the next big thing to implode--which is all too familiar within the commercial real estate industry--is finally getting some mainstream attention. On Saturday, speaking at a conference at Vanderbilt University, Atlanta Federal Reserve Bank president Dennis Lockhart said that "on our watch list this year, as a risk to the (U.S. economic) outlook, is continuing worsening in the commercial real estate sector."

Oh my. An economist mentioned commercial real estate as something they will watch this year. And it generates a doom and gloom headline. This is a classic Soros investing tactic: identify when everyone else is wrong, then do the opposite of what they're doing. So if there is more fear in the commercial sector than is warranted (and that requires some analysis with horsepower), then investors will find some good opportunities, particularly in markets and submarkets where the fear or "gloom" may be particularly unjustified. I see those all around me where I live and write.

So watch those barometers.

Take this paragraph from the same article:

Whatever else commercial real estate will be in the near- to medium term, it certainly won't see the investment volume of recent years, not only in the United States but almost everywhere in the world. According to Real Capital Analytics, about 1,000 buildings valued at $47 billion traded hands worldwide in the first quarter of 2009, a small fraction--about 16 percent--of the volume during the same period in 2007.

Did you catch that? Only 16% of last year! Yeah, but there were still about 1,000 buildings valued at $47 billion in this past quarter sold. Last I thought about it, $47 billion is still a lot of money. Certainly it's enough for nimble and aggressive investors and brokers with buying power -- and in the right markets such as Houston.

When Liability Insurance Attacks: For Home Sellers

Our insurance adviser tells us that one of the highest liability risk periods for any home owner is when they market the home for sale. This makes sense because hopefully a lot of interested buyers will be coming onto the property to see it -- most of them strangers. If someone falls, etc., it's like any other time basically -- there could be a liability claim against you. A standard Listing Agreement with any real estate broker should cover this in some further detail, however your best protection on all of these issues is to speak with your insurance agent.

We have even been advised that some home owner insurance carriers will not even establish a new policy while a house is on the market for sale because of the increased risk. Also, as with any insurance policy, the beast is in the exceptions listed in the policy, not to mention insufficient coverage compared to the likely liability cost a covered incident provides for in the policy. (For example, if you only have $5,000 for injury liability but someone breaks a leg, you could well be on the hook for way more than $5,000.)

Cheap insurance quotes are like discount real estate brokers in my opinion: you think you're saving money (and most times you're really not) -- and you better hope you never need them.

Another scenario: I have a pit bull and so am very aware that many home owner liability policies will either a) not cover pets, or b) not cover certain breeds from the liability policy. So every pet-owning home owner must be clear on that aspect of their policy. Even if your pet's actions are covered, you want to be sure the coverage is sufficient for any likely claim scenario - as with the above example, a dog bite could put you on the hot seat for way way more than $5,000 if that's the limit in your policy. Nothing stops anyone from suing you for more than your insurance coverage. If that person were to win in court, the plaintiff can pursue your other assets. Anyway your insurance agent can speak to all of this, and if anything in this post is news to you, you should call that agent right away.

Other critical items in my view to discuss with your insurance agent:

• Whether you need a business rider on your car insurance. Without it, if the insurance adjuster determines your car was being used for business in a collision, your coverage could be denied.
  

• Establishing or raising the value of an umbrella insurance policy to enhance your coverage limits. Think about it: if you have a catastrophic car crash that's your fault, if you have minimum coverage, your insurance carrier has every incentive to write a check for $25,000 (if that's your limit) and walk-away, leaving you with potentially hundreds of thousands in additional liability in the incident. Proper coverage including affordable umbrella coverage at $1 million, for example, could put your insurance company on the hot seat for up to $1.5 million in such an incident -- that's a sure calling card for their A-Team lawyers to come to your defense with that much of their own money on the line.

• Whether your carrier is a mutual company, meaning its policy-holders own the company, or whether your carrier is a publicly traded corporation whose shareholders own the company. This basically gets to one important aspect: making sure your carrier, no matter how it's structured, has a good reputation for being fair about pay-outs on claims. In this Google era, you can do some private due diligence of your own as well.

Like I said, insurance is more than just a cheap quote. Sometimes you get what you pay for, and -- as is the case with my own professional role as a real estate broker -- sometimes the right adviser with the right ethics, experience, and expertise can get you far better results for the same "low price." At any rate, if you just go with the cheapest quote on anything in life without examining what's behind it, then whatever it is, you better hope you never need it.

Houston House Prices: Still Pretty Good

From the new Houston Association of Realtors press release on recent home sale data:

Single-Family Homes Update
At $182,316, the average sales price for single-family homes dropped 10.5 percent from February 2008, when it was $203,797. However, the figure is up $18,000 from January of this year. The median price of single-family homes in February was $138,970, off 8.0 percent from one year earlier, but up about $10,000 from January. The national single-family median price reported by NAR is $169,900, illustrating the continued higher value and lower cost of living that prevail in the Houston market.

Now I can tell you we are not seeing those kinds of declines in value on the far north side of Houston in quality neighborhoods and with quality homes. The decline there, if any, is hardly noticeable.

But really, this chart contained in the release is all you need to see to get a simple read of the situation in Houston:

Look at the trend lines. Both the average price (skewed higher by expensive homes) and the median price (half of all sales are priced higher, half lower) -- both average and median trend lines show something very important that you can clearly see just by eyeballing it:

Prices in the Houston area are at mid-2007 levels right now.

In case anyone missed it, 2007 was a pretty darn good year for housing in Houston.

Houston #1 Corporate Growth In The United States

From the Houston Business Journal, a report about Houston at "the No. 1 spot for the first time on Site Selection magazine’s list of Top Metro rankings for corporate location and expansion activity."

Eat that, Chicago (#3)!!

And coming in at #2 behind Houston? Our little sister to the north, Dallas.

Site Selection said Houston clinched the top spot after scoring 179 corporate real estate deals in 2008, unseating three-year incumbent Chicago-Naperville-Joliet.
Dallas-Fort Worth-Arlington finished No. 2 with 156 projects, and Chicago came in third with 138.

Last year, Houston was No. 4 behind Cincinnati and St. Louis for cities with more than 1 million in population.

“Site Selection ’s award adds to the long and growing list of distinctions the Houston area is earning for our business recruitment, business retention, job creation and economic growth efforts,” Jeff Moseley, president and chief executive officer of the Greater Houston Partnership, said in a statement. “We will continue to show that the Houston region is the most attractive place to locate or expand your business in the United States.”

There is no place in The United States that I would rather own real estate right now than in and around the Houston metro area and definitely in the rightfully proud great State of Texas. (That's why I do, of course.)

Why Buyers Need Smart, Full-Time Professional Real Estate Brokers

Today's New York Times has a story about the new financial regulations under development in the new administration.

While there is a ton of badly needed regulatory reform that will address many of the problems already laid out on this blog to be included in the package, I will focus in this post on the impact of these wide-ranging changes on the real estate buyer. But first, an example of the broader much-needed reforms:

The administration is also preparing to require that derivatives like credit default swaps, a type of insurance against loan defaults that were at the center of the financial meltdown last year, be traded through a central clearinghouse and possibly on one or more exchanges. That would make it significantly easier for regulators to supervise their use.

Now to return specifically to real estate buyers. First and foremost, buyers will have to navigate a very new landscape of mortgage financing without necessarily understanding the recent history and context of the changes, which could lead to frustration and confusion. To wit:

Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.

Now more than ever before, financing is a huge complex piece of any real estate transaction. While it always should have been the starting point for buyers, in recent years when money was flowing freely, few people in the industry ever had to be concerned about a client getting financing for a deal, so long as the client had a pulse. Of course, things have changed dramatically, and directly as a result of that free-flowing period.

Therefore real estate brokers and agents of residential or commercial orientation, in order to fulfill their "market making" roles, will have to become far more involved in an ever-increasingly complex mortgage and finance environment to help buyers make their way through the complexity. We brokers can no longer just refer a buyer to certain lenders and leave them on their own. Doing so in this environment is a profound disservice.

As new regulations get rolled out, real estate brokers must stay at the leading edge to comprehend not just the rules, but their implications in any specific market. We must also help clients with their due diligence efforts when finding qualified lenders to help ensure clients find competent, informed, and ethical lenders with solid reputations. Bad financing is by far the most common reason a deal fails. This is a larger and far more complex obstacle than ever before.

The proposals that will come to pass in specific form are aimed, according to officials, at core regulatory problems and gaps:

They include lax government oversight of financial institutions and lenders, poor risk management efforts by banks and other financial companies, the creation of exotic financial instruments that were not adequately supported by their issuing companies, and risky and ill-considered borrowing habits of many homeowners whose homes are now worth significantly less than their mortgages.

Even high level regulations that affect lending way upstream will have to be understood by real estate brokers, not just mortgage brokers, as we move forward to manage fully the implications for buyers on the ground.

The new trading procedures for derivatives could also enable regulators to impose capital and collateral requirements on companies that issue credit default swaps that would make them safer investments. American International Group, one of the largest issuer of such swaps, never had to post collateral and nearly collapsed as a result of issuing a huge volume of such instruments that it was unable to support.

Going forward, real estate brokers and their agents who cannot understand the implications of such complex reforms for their clients in their specific market, and who cannot fully explain those implications to their clients if necessary, those brokers and agents will surely lead their buyer clients to failure, and that will undermine the market for everyone.

Bottom line: Brokers and their agents can no longer blindly refer buyer clients to a cadre of lenders they've used in the past. A higher standard for due diligence is required in this market, and while that responsibility falls principally on buyers, everyone assisting the buyer must support that effort. Those who don't understand the critical times and adaptation they require will not only be doing their clients a profound disservice, they will impede the progress and recovery of real estate markets for everyone.

New Rule: Sell Low, Buy Low

Recently at a good friend's holiday party I met a very nice woman who wants to leave her house of 20+ years where she raised her children to move into a single story, smaller house. She has a very common problem: she no longer can climb the stairs to and from her master bedroom and bathroom every day without difficulty.

For many young families, floor plans with all bedrooms up offer a very good value -- they get a functional layout downstairs for family activities and 4 bedrooms or so upstairs including the master, which also usually keeps the footprint of the house small so that it fits well onto a small but affordable lot. Using upstairs space for livable square footage is also a good value because upstairs square footage is much less expensive to produce, since a house only has one foundation, one roof, one set of plumbing stacks, etc. On a per-square-foot basis, single stories are often priced higher than comparable two-story homes for this reason (and a few others).

Some young parents also feel reassured sleeping close to their young children.

[An often overlooked advantage to having a master suite upstairs is that it typically allows for a much larger master suite.]

But in a few decades, those young parents become empty nesters and their many years of hard-work may leave their bodies a little less forgiving with the stair climbing up and down all day every day.

So the lady at the party with whom I was speaking felt like now is not a good time to sell in the market, particularly because she paid at the high end of the market cycle in the early 80's and it's difficult to face a lousy investment return on a house, even though the house has served as the main family stage for those many years. Memories aside, the simple numbers are disappointing. I get it.

So I asked her if she wanted to stay in the same area, and she said yes because her adult children still live in the general area.

"No problem, " I said. "You may sell your house for less than you might have a few years ago, but you're also going to pay less for your next house."

This is the new rule for taking advantage of the current housing market: sell low, buy low.

So for many people who might want to downsize or even buy a bigger house, if the goal is to stay within the same general market area, then it would hold that however much the market may be depressed, it's depressed on both the selling and the buying side. So yeah, you might not get to sell for as much as you would like (nobody ever does in Houston), but you will get to buy for less in the same market!

Not to mention the historically low interest rates right now for qualified buyers. (Well qualified buyers have no excuse not to be in the housing market right now. Move up, refinance, whatever, but now is your time.)

Think of the California market circa 2005, for example. What use would it serve for a couple to sell their 1200 SF home for $1.5 million if all they could do was buy another comparable 1200 SF home for $1.5 million?!? This is why Texas saw so many people relocate from California and other areas, because cashing out was only possible by selling in the high market and moving to buy in a market that wasn't so wildly out of control (ie, Houston).

It occurs to me that the reverse is now true in most housing markets. Sure prices may be a little down year-over-year, which makes the thought of selling daunting if one doesn't have to sell. However the market also has good buying opportunities coupled with historically, ridiculously low 30-year fixed interest rates.

In conclusion, it is not a buyer's market. It is not a seller's market. The forces affecting each side are relatively balanced when you think about it. So it's not a bad time to sell if what you want to do is turn around and buy. So don't give up, the opportunity to get what you need or want is still very much available in this market.

Funny How You Always Find Your Car Keys...

A friend of mine pointed out recently:

Funny how you always find your car keys in the last place you look.

True that.

But the same cannot be said of looking for homes. I've never heard anyone say after finding their car keys, "Well maybe I should keep looking, just to be sure."

Occasionally people know it when they see it, but for most, it's not that easy. Or romantic.

New Home Buyers Beware & Be Aware

Often when we brokers get the chance to work with new home buyers who buy a house to be built for them by a production builder, we see a standard set of issues arise. The most important mistake we see in the market, over and over again, is that buyers do not realize that if they do not use a licensed agent or broker to represent their sole interests, they are on their own essentially because everyone on the builder side, sales counselors included (who are not licensed in the state of Texas), they all work for the builder and in the builder's interest.

That is not to say that buyers cannot have a wonderful and satisfying experience with home builders, however the process is fraught with complexities and potential problems that an experienced agent or broker can help avoid.

Sometimes potential buyers who do their homework may find complaints about a builder somewhere online. While this is important information, it should not be conclusive.

I like to take a look at the buyer complaints on record and analyze them. It doesn't entirely surprise me to find online complaints about any major builder because one of two things might be happening, or both, particularly with production builders who cater to first-time or inexperienced buyers:

i) the builder may be a bum builder and perhaps takes advantage of its mostly first-time buyers, and/or

ii) I've found that many first-time buyers are not accustomed to the process, and if they are not properly advised by an independent agent or broker representing the buyer's sole interests, then buyers can be disillusioned by basically standard operating procedures by builders. Most new buyers do not use an agent to represent them, only because they don't know to do so, and the sales counselors work exclusively for the builders. So any conflicts are generally settled in favor of the builder, much to the frustration of the buyers.

New buyers therefore can easily be misled. A common example is during the build process, the buyers may make a request of the sales counselor, such as to change their carpet choice for instance, and the sales counselor will tell them "no problem." The clients think there's no charge but then later come to find out that there could be a "change fee" or a charge for removing existing carpet and/or an upgrade charge.

This is standard procedure in general, but the mismatched expectations and poor communication on the part of the sales counselor / superintendent can leave many people raw. Sometimes weather delays also incense people.

Structural problems however are always inexcusable, such as faulty workmanship, plumbing problems, etc. But most of those things are covered under the standard builder warranty, headaches though they are. (An independent inspection prior to closing can help alleviate any major problems - something else a buyer agent/broker can facilitate.)

Another important part of buyer due diligence is to drive the new neighborhood and see how many homes are already being lived in by former buyers. The more there are, and the longer the neighborhood has been under development, the better the indications are.

Also, it's always advisable for potential buyers to stop and talk with residents in any neighborhood they're considering while being careful not to put too much importance on any particular resident with whom they speak.

But bottom line: a) buyers should not do anything that makes them uncomfortable, but b) remember that an experienced agent or broker can represent buyer interests exclusively and will be the buyer representative with the builder, and that agent or broker, if experienced and reliable, should be able to interfere with most potential problems when building a new home.

Everyone Thinks Real Estate Agents Are Stupid

Even other real estate agents.

Sometimes I don't know whether to laugh or cry at the crooked stuff we see in the market. The lowest of the low operate completely under the radar... until you're unfortunate enough to find yourself or your clients up against them (luckily we're well prepared to deal with them).

But others just like to spam email and prey on amateur, part-time, ill-informed, or just plain "dim" agents across the nation, many of whom really need a break right now.

One example from our Spam Box (75% of our email volume is spam), from recessionproofwebinars@gmail.com entitled "Big Costly Realtor Mistake" (I can already smell the money):

Hi Nicholas,
This drives me crazy. And I see it all the time.
And if you do this, it's costing you a freakin'
fortune in opportunities that's slipped through
your fingers.

You can cut to the chase and click here to hear me out:

https://www2.gotomeeting...

But, if not, here's what I'm so frustrated with:

People get a dent or two in their credit ... maybe
even a big one ... and they start to believe they
can't run with the pack.

Or they run out of money. And believe that they can't
do a thing as a Realtor or a real estate investor
without a decent bankroll.

I've heard it enough times to make me sick at heart:
"I can't do anything without enough for marketing,
or at least a small down payment. And my credit's
shot!"

So they take themselves out of the game. They get
in a downer. Especially if they get one or two
doors closed in their face.

They feel that they can't compete with other Realtors
and Investors who are finding a flipping pre-foreclosures
for big time money.

Pardon me while I blast through that pile of crap.

Here's the facts:

*You don't need to do ANY marketing if you do what
we've been doing. And it works. We get enough business
to turn it away or refer it out ... without a dime
in advertising

*Bankers, etc. almost EXPECT credit issues today. If
anything, they are realistic. And they've lowered
their demands considerably in this climate.

*That said, there are still a few overly conservative
money people with a board up their butt. (If you've got
a door slammed in your face, you've met one.) But for
every one of those, there are two more who will welcome
you in, IF you know the "secret code."

And that's one of the things we've been showing in our
fr'ee wildly popular webinar held this Saturday at 2 PM:

https://www2.gotomeeting...

Look, it don't mean Jack if your credit score is 300,
your car's being repo'd, your house is being auctioned,
and you're moving back home with mom and dad.

We've had students beyond count who've gotten moving,
without a nickle to their name, and credit that would
embarrass a 3rd world refugee.

You need to know this - they've used our secrets to start
generating an income fast.

And if you think you can't do that, like they are somehow
"special," then you sure as heck didn't meet them
when we did ;-)

It's actually kind of funny ... every time we see another
one start cranking out the sales, they become more than
students. They actually become fans.

My biggest job then becomes to make sure they know that
all it took was the right knowledge, and the ability for
THEM to decide to take action.

Decide to take action now, and see what they learned ...
it won't cost you a cent this Saturday at 2 PM EST:

https://www2.gotomeeting...

Sincerely,

Chris

P.S.: Have you seen the latest ShortSalesRiches fan? Check
it out after you register for the webinar!

http://www.youtube...

And here's the great part. If you click the register link, you get this message (I know, I know, I clicked, but I was curious and cautious):

Chris McLaughlin, the 6th largest broker in Florida, and Nathan Jurewicz, a street savvy real estate investor, will discuss how you can make more money now than ever before ... in this economy! And we'll show you why a recession is actually GOOD for real estate investors!

Really! Recessions are GOOD for real estate! [/snark]

It's sad, but I bet these guys make a small fortune off people down on their luck before they get forced out of the industry. Is it any wonder how real estate got so out of control with freaks like this still out looking for prey?

Merry Christmas!

Why Do Bad Things Happen...

In real estate, people sell their homes for many reasons, the most generalized category of which could be simply "life changes." Whether a family is being transferred or empty-nesters are looking to "downsize", it's life's big stations or events that often induce the change.

All too often, however, the life change is something painful. A divorce, a death, a catastrophic illness... any number of ways that life can truly surprise and shock.

It's an age-old question, but one that we confront in our business time and time again: why do bad things happen to good people?

On many days, I am likely to answer simply, "I don't know. But I bet they happen as often as much as good things happen to good people, or 'nothing' happens to everyone, or good things happen to good people, or -- as much as we think we see it too often -- good things happen to bad people." And yet that answer always feels like it falls short. And it does.

Some people approach the question by going cosmic. Perhaps there's some kind of karmic cycles playing out in and around us. Maybe it's of the social sciences domain, and we all invite the kinds of events around us by how we all live and work together as part of the grand social contract.

Once again, to all these ideas and more, I can still only answer with that great cosmic thud, "I don't know."

But I do know what I see every day. It is one of the more interesting and compelling -- and sometimes very difficult -- lenses through which we get to view the world as real estate brokers: life changes. We see, because we often have to, behind the social veil that gives most of us privacy over our most painful episodes in life.

Nobody really expects their real estate broker to be someone who can say credibly, "You are not alone." And I can't figure out how to say that in such a way that is helpful and doesn't perhaps imply a demeaning of someone's uniquely painful circumstance. So sometimes we as brokers are best left just to listen to what someone wants to tell us and respond to them and their unique circumstance the best we can, because every person's circumstance is unique in several ways.

People might not expect their real estate brokers to be credible on the point of knowing when someone's painful life circumstance is shared by others, whether someone is truly "not alone." Saying so to someone in the moment may sound like hollow or synthetic sympathy. But in truth, as real estate brokers, whether we say it or not, we really are in a position to know.