An Appraiser called recently to get access to Hill Street Lofts, a community I’ve sold several condos in over the past 5 years. He was called out to perform a final appraisal for the short sale approval. Apparently, my listing was his first Appraisal in the community and he remembered the detailed information I shared with him about the community’s situation and the declining values. He asked me why values continue to decline there, specifically, and whether I thought it would be 5+ years before the Atlanta market improves. He also asked, “What do you think about the current market conditions and what is it going to take for the market turn around in an equitable direction”?
My response was based on applied mathematics. The truth is undisputable. The market is suffering from two evils. The first being the mortgage fraud in pricing and appraisal practices of major banks. Secondly, it is suffering from buyer perspective about property valuation and the concept of investing in real estate. When we invest in the stock market, it is true we buy low and sell high because that investment is short term and volatile. When we buy real estate, we are investing in a much more long term investment, a 30 year mortgage, which is far from short term or volatile.
Mathematically speaking, the market’s continuous decline is synonymous with the slope or gradient of a line, which describes its steepness or incline. A higher slope value indicates a steeper incline of the function Y=MX + B. In the real estate market, X = purchase prices and Y = market value, M = some factor having exponential impact on price and B = any constant factor impacting the market.
I totally get it that we all want to save a dollar and get the most bang for our buck.
But purchasing real estate isn’t like purchasing meat at the market. I educate my buyers that purchasing the nicest home in the community at the lowest price in the neighborhood is only a good for a “bragging right” up to the day of closing. After closing, you own that home in a community which has just experienced one more decline in property value by the comparable price you paid for the home.
Recalling the slope of a line function above, the X value in the equation has just been reduced by another lower priced purchase. The value of a property, anywhere in the world, is based strictly on COMPARABLE MARKET ANALYSIS, or a CMA. Therefore, if your neighbor sells his home for $50K less than CMA, guess what, your property value will also experience $50K CMA depreciation. But now you’re an investor or home owner in a neighborhood that’s just depreciated in value and that low priced purchase directly influenced your decline in value. Now, no one’s home is in a position to gain equity for as long as the depreciation continues. That sucks, doesn’t it?
The property values around you are directly influenced by your neighbor’s property values and each low ball purchase lowers the value of every home in the entire neighborhood. This is the hidden negative of purchasing low versus purchasing “equitably”. If you “appreciate” (defined recognizing with gratitude or increasing the value of) your investments, they will grow and gain value. If you don’t appreciate them, they will depreciate and decline in value, thus becoming a liability for everyone. This is exactly the philosophy the wealthy use to move certain groups of people out of an area prior to re-gentrification. Who wants more liability? So, do you “appreciate” your investment? If so, you will appreciate it before and after you invest in it. Otherwise, why are you investing in it? Are you intentionally trying to throw money away? If so, I’ll be happy to help you blow several thousands of dollars! Just give me a call and we can map out an affective plan to blow thousands of dollars over lunch, and yes, the bill’s on you.
Perspective Primary Resident Buyers be aware that purchasing cheap will lead to experiencing depreciated value in the short term and slow to no home equity in the long term. If Buyers would take a moment to experience a mind shift from a consumer to an investor, they would equitably appreciate the value of real estate before and after they purchase it. Furthermore, the real estate investment will grow over the short and long term, allowing your entire community to experience greater “Return On Investment”, which will breathe new life into a market that deserves proper representation of the American Dream, home ownership. Some may argue this point. For those that do I offer this thought. How else would you suggest reversing the slope of depreciating home values besides appreciating those values through increased, more equitable, sales prices?
Think of this example of fact. The appraisal drives prices and property values. If the Appraiser can justify price points with comparable properties with higher sales prices, no one can dispute the current value of the property. The obstacle consumers have to deal with is the massive number of bank owned properties for sale. In the eyes of the bank, vs. the HOA member, the property is like surplus inventory, or spoilage. What do supermarkets do with spoilage? They discount it first. Secondly, they discard of the waste. Finally, they write off the expense. By the way folks, the write-off stage is where your “Bail-Out money went. In each phase, the value depreciates. Therefore, if sales increase, there is less “spoilage” in inventory leaving less waste and higher sales prices for valuable property in your area. To read about a specific situation related to this, refer to my blog titled, "A Real Property Appraisal is Property of Whom".
As in the input values and output values of the slope formula, y=mx+b, if you continue to input decreasing values into your equation, your graph WILL CONTINUE TO SLOPE DOWN. That graph indicates the value of your real estate investment. The only way to plot the same equation with an increasing Y coordinate, and thus a positive slope, is to input increasing values for X, which are your increasing sales prices. Since M is directly related to the values and variance of X, sales prices MUST increase for property values to increase and the market to recover by a multiple of M. The only other main factor, which we will label factor B, is Employment. So B = Employed Workers, which must also be an increasing number input into the equation for values to increase.
There are NO other ways to influence market improvement. All things being equal, it is understood that the banks and appraisal industry also have a big influence in property values, but we will assume that they are following the same convention of investment for the sake of this discussion. In fact, they stand to earn equally with their inventory directly and indirectly. It’s a win win for the consumer and the banking industry if everyone values property correctly, which is equitably. However, they would be factors of B as well. So, if X and B remain positive and increasing, the real estate market will rebound in less than five years. Thinking equitably now for the future, not the “give me more for less now” mentality, is the perspective Buyer’s must adopt for the real estate market to rebound.
Personally, I don’t recommend my buyers look for the cheapest home on the street. I don’t say “spend your life savings and paycheck here” either. I ask them to consider variables such as street in the community, location of home on land, and condition in comparison to other homes. I recommend purchasing objectives that bring the most VALUE to their real estate investment and remind them that their purchase directly influences the direction the values in the community take immediately following their purchase. By thinking this way, I encourage them to think of it as making a positive investment in the community. The same concept is used when a person purchases in an organized HOA community. That person must make an initial Capital Investment at closing. The Capital Investment goes towards larger expenses to assure all HOA members that the property values will remain as high as possible by performing capital improvements in a timely fashion. Just because you live in an established community, doesn’t mean you don’t need an HOA. In fact, I would recommend that any older community would be will served by maintaining an active Home Owners Association. Those that do understand that they are not an island and they must work together for everyone to make money on their real estate investment.
In the end, real estate is an emotional purchase that is led mostly by psychological influences for most Buyers, rather then by the true comprehension of the investment being made. I’d encourage every active Buyer to ask yourself why you’re buying before you sign any contracts. If it’s not to make a positive investment in your family’s future through the purchase and sale of real estate, then you’d probably do your community a favor by remaining a renter. There are many nice rental properties that will allow you to remain in your budget while allowing community property values to sustain their equity. If making a positive investment in your family’s future is your objective, then focus on the question most successful investors consider, “What is the investment is really worth now and long term?”
“If you appreciate your investment now, it will appreciate you in the future”.
Frederick L. Rucker, Jr.
No comments:
Post a Comment