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Nov222016


HOW TO SELL A HOUSE FOR $100,000 PROFIT AND STILL LOSE MONEY

MOST HOMEOWNERS IGNORE THE CARRYING COSTS DURING THEIR OWNERSHIP PERIOD WHEN
THEY CALCULATE THE GAIN OR LOSS ON A SALE, BEING THIS SAID IF YOU NEED TO SELL A
HOUSE FAST IN UTAH, WORK WITH PROFESSIONAL HOME BUYERS

--------------------------------------------------------------------------------

If someone claims they bought a house for $900,000 and sold it for $1,000,000,
how much money did they make? $100,000? No, not even close.

People tend to forget about the transaction fees and carrying costs when they
compute the gains and returns on their real estate purchases. In the example
above, when the buyer paid $900,000, the actual costs paid at closing were
probably $5,000 to $15,000 higher due to closing costs, appraisals, lender fees,
insurance, and other miscellaneous closing costs. If you have troubles getting a
property sold, try advertising it online using Both showcase idx packages which
are great options to choose.

The homeowner lost another large chunk when they sold. Most people still pay a
5% to 6% commission to a real estate agent when they sell their house, so the
$1,000,000 sale cost them $50,000 to $60,000. Further, if sellers make repairs
prior to listing, which they commonly do, those costs further increase their
basis. Between the initial costs, subsequent repairs, and closing costs, it’s
easy to see how someone can sell a house for a $100,000 profit and end up making
nothing at all.


CARRYING COSTS

Many homeowners in California ignore the excessive carrying costs they paid
during their ownership tenure. The monthly costs should not be entirely added to
carrying costs because a component of those costs is unavoidable consumption.
However, any amount paid on a monthly basis in excess of a comparable rental
exceeds the consumptive value, and these costs must be added to the basis to
compute the actual profit and loss during the ownership period.

For example, after adjusting for tax savings, amortization, and opportunity
costs, many homeowners in California pay monthly ownership costs in excess of a
comparable rental. Rather than buying a house, the homeowner could rent a
similar house in the neighborhood, and after adjustments, this savings might be
$1,000 or more in some communities.

The owner paid $1,000 per month to be on title rather than on lease, and this
extra payment is an additional carrying cost of the investment. Over a five-year
holding period, this could amount to $40,000 to $60,000 in additional costs
depending on how much rent escalated during that period.


PERHAPS 2007 WASN’T A GOOD TIME TO BUY

Let’s consider the case of a 2007 homebuyer in Irvine who paid $900,000 in 2007.
Back near the peak of the housing bubble, this $900,000 purchase price
translated to a monthly cost of ownership at least $2,000 per month in excess of
a comparable rental even after the tax savings and other adjustments.

By 2016, this homeowner has probably refinanced to lower their payments, and
rents escalated during that time, but at best, the costs today are at rental
parity. Over the 9 years that owner held title, they paid approximately $100,000
in extra carrying costs as compared to a rental.

So let’s say they sell today. Last year, Irvine exceeded the bubble-era peak, so
today that owner could probably sell for $1,000,000, a paper profit of $100,000.
Since their loan amortized, and since they likely put money down, they will
obtain a check at closing. It won’t feel like a loss to them, and they will
forget about the excess mortgage interest and other costs they incurred while
they owned it. Their closing costs will include a $60,000 commission.

So how does it all add up? They actually paid about $910,000. They paid $100,000
in extra carrying costs. Their actual cost basis is $1,010,000, and their
closing net was $930,000 after commissions and closing costs, so on the sale for
a $100,000 profit, they actually lost $80,000.

And that was after spending eight years trapped in their home, underwater on
their mortgage.


RENTAL PARITY IS KEY

The opposite scenario also played out over the last five years. People who
bought in 2011 made a fortune. Even in California, most markets in 2011 traded
at or below rental parity, with the inflated beach communities a notable
exception. Instead of paying an extra $1,000 or more a month to own, those
buyers saved hundreds or even thousands of dollars a month compared to a rental,
savings that should properly be subtracted from their cost basis.

A buyer of a $700,000 house in 2011 may have saved an extra $100,000 over
renting, particularly since rents rose so strongly over the last few years. In
addition, that $700,000 is probably worth $1,000,000 or more today, so their
math looks a bit different.

They actually paid $710,000, but they saved $100,000 in carrying costs, bringing
their basis down to $610,000. They netted $930,000 after commissions and
closing, but on the sale for $300,000 in profit, they actually made $320,000.

Timing the housing market properly saves buyers big money.

Don’t underestimate the importance of rental parity analysis when calculating
the actual profit and loss on a real estate purchase, especially on a family
home.



Published by Irvine Renter


21 RESPONSES TO “HOW TO SELL A HOUSE FOR $100,000 PROFIT AND STILL LOSE MONEY”


 1.  Larry Roberts says:
     November 22, 2016 at 2:34 am
     
     Portrait of a Long-Term Renter: Crossing Generational Divides
     
     For many Americans, owning a home is a rite of passage. But not everyone
     puts homeownership on their priority list.
     
     Long-term renters (those who have been renting for more than one year) are
     opting out of the home-buying game for a variety of reasons, from a desire
     for mobility to simply not being able to afford a home purchase.
     
     It’s not just twenty-somethings who make up this group — the population of
     long-term renters spans all generations, from millennials to baby boomers.
     
     According to the Zillow Group Report on Consumer Housing Trends, 56 percent
     of today’s renters are millennials (ages 18 to 34). While a majority of
     renters are in their 20s and 30s, not everyone is in the under-40-club: 28
     percent are part of Generation X (ages 35 to 49), and Baby Boomers (ages 50
     to 64) make up another 12 percent.
     
     “I want flexibility — not a mortgage”
     
     Many renters are staying in the rental market longer than they planned, as
     evidenced by falling homeownership rates over the past decade. The Zillow
     Group Report on Consumer Housing Trends reveals that long-term renters are
     generally content with their current living situations. This echoes what
     long-term renters across the United States are saying: It’s about
     flexibility.

     
 2.  Larry Roberts says:
     November 22, 2016 at 2:35 am
     
     The salary you must earn to buy a home in 27 metros
     
     See below exactly how much salary you would need to earn in order to afford
     the principal, interest, taxes and insurance payments on a median-priced
     home in 27 metro areas.
     
     Key takeaways:
     
     Quarter-to-quarter, home-price changes were mixed, with 13 metros seeing
     declines and 14 seeing increases.
     
     Excepting Pittsburgh, prices were up on a year-over-year basis in all of
     the metros we cover, with gains as high as 15.17 percent.
     
     For the second consecutive quarter, mortgage rates were down across the
     board.
     
     Lower mortgage rates were more than enough to offset small home-price
     increases, improving affordability in all but four markets.
     
     A large quarterly bump in home prices means that buying a median-priced
     home in the LA metro area now requires a jumbo mortgage.
     
     http://www.hsh.com/images/slideshow/city_salary_static.png
     
     * FutureBuyer says:
       November 22, 2016 at 4:45 pm
       
       If that’s really the salary you needed, wife and I would own a couple of
       homes in Ca. The truth is those salaries should be double, because
       otherwise you are a few paychecks away from being in the poor house.
       
       * Larry Roberts says:
         November 22, 2016 at 4:50 pm
         
         Those numbers assume a high debt-to-income ratio, probably higher than
         many people would feel comfortable with.
       
         
       
     * Mellow Ruse says:
       November 22, 2016 at 8:30 pm
       
       All of these salaries should be even higher now that rates have jumped
       0.5% in past month.
       
       * Woody says:
         November 22, 2016 at 10:27 pm
         
         On an OC median priced home just had a monthly cost increase of 270
         dollars per month.
         
         * Larry Roberts says:
           November 22, 2016 at 10:35 pm
           
           If it takes a 12% increase in salaries to overcome a 1% increase in
           mortgage rates, houses in OC got 6% more expensive in less than two
           weeks.
         
           
         
       
     
 3.  Larry Roberts says:
     November 22, 2016 at 2:40 am
     
     The Obamas are doing their part to stimulate the real estate market.
     
     The Obamas are going bicoastal
     
     The Obamas are moving into a nine-bedroom mansion in the Kalorama section
     of Washington — the posh neighborhood of diplomats and DC old money — while
     younger daughter Sasha finishes high school at Sidwell Friends. But they
     have apparently been buying real estate elsewhere, too.
     
     According to sources, the Obamas have purchased a house in Rancho Mirage,
     Calif., not far from Sunnylands, the former Annenberg estate, which
     presidents use as a getaway and which is thought of as the unofficial West
     Coast Camp David.
     
     Rancho Mirage, where Gerald Ford retired, is a top destination for golf — a
     favorite pastime of President Obama. The local daily newspaper, the Desert
     Sun, has reported rumors of such a sale for more than a year. But sources
     say now it’s a done deal.
     
     The Obamas are also said to have bought a holiday getaway in Obama’s
     childhood home state of Hawaii.

     
 4.  Larry Roberts says:
     November 22, 2016 at 2:50 am
     
     I think bank investors will be disappointed in Trump. If he is the populist
     he claims to be, his presidency will not be a boon to the big banks. The
     rally in bank stocks is predicated on the idea that Trump will abandon his
     populist rhetoric in favor of establishment Republican ideals of screwing
     over the common man in favor of the financial elite. I don’t think Trump
     will behave that way, at least not if he wants to win reelection.
     
     Big banks are more excited about Donald Trump than any other president in
     almost 100 years
     
     In the final few weeks of the US presidential campaign, Donald Trump warned
     that his rival, Hillary Clinton, “meets in secret with international banks
     to plot the destruction of US sovereignty.” Out on the trail, he suggested
     everyone from Goldman Sachs to the Federal Reserve were in on a conspiracy
     to keep America down.
     
     But for all of his criticism of Wall Street before the election, under a
     Trump administration banks are in line for a bonanza. How can you tell?
     Since Trump won the vote, US bank stocks have rallied more strongly in the
     post-election, pre-inauguration period than for any other first-term
     president going back to Herbert Hoover.
     
     https://qzprod.files.wordpress.com/2016/11/output_2u12cm.gif?w=652

     
 5.  Larry Roberts says:
     November 22, 2016 at 2:54 am
     
     Supreme Court ruling could have far-reaching implications for brokerages
     
     The California Supreme Court ruled Monday that a real estate brokerage
     representing both the buyer and seller in a deal owes the same fiduciary
     responsibilities to each party, potentially setting a significant precedent
     for how information is shared in so-called “dual-agency transactions.”
     
     In a unanimous decision, the court ruled in Horiike v. Coldwell Banker that
     a when an agent representing a seller is working for the same firm as the
     agent representing the buyer, they become an “associate licensee” and must
     properly investigate and disclose all important information related to the
     transaction.
     
     The case centers on a Chinese millionaire’s 2007 purchase of a Malibu
     mansion and the manner in which the property’s size was listed. The buyer,
     Hiroshi Horiike, worked through one Coldwell Banker agent, Chizuko Namba,
     to purchase the home. The seller was represented by another Coldwell Banker
     associate — celebrity realtor Chris Cortazzo, who is being sued for $3.3
     million in a separate case.
     
     After his $12.25 million purchase, Horiike raised issue with the way
     Cortazzo advertised the property’s square footage, alleging he
     misrepresented its size by thousands of feet. Horiike eventually sued,
     losing in a lower court in 2012. However, he emerged victorious in 2014
     when the California Second District Court of Appeals ruled that under the
     state’s Civil Code, Coldwell Banker was operating as a dual agent and owed
     fiduciary responsibility to Horiike through both of its agents — a decision
     appealed by the brokerage firm.
     
     Monday’s decision affirms the appeals court’s ruling, creating a “very
     significant and substantial but not onerous” responsibility for dual-agency
     brokerages, said attorney Fred Cohen, who represented Horiike before the
     Supreme Court.
     
     “This case makes clear the [selling agent] has to take that duty serious
     and make sure the buyer goes into the transaction with his or her eyes
     open,” Cohen said.

     
 6.  Larry Roberts says:
     November 22, 2016 at 4:27 pm
     
     The thinking among futurists is that garages will go away. They
     fundamentally misunderstand that most people use their garage as a storage
     place for their excessive clutter, not as a place to actually park a car.
     Further, just because cars are driverless won’t mean that people will not
     still want to own one. People will want their own driverless car just like
     they wanted their own horse, their own carriage, and their own car.
     
     Are Garageless Homes the Future?
     
     Self-autonomous vehicles are expected to be available commercially within
     the next five years, and by 2030, driverless cars could make up as much as
     60 percent of U.S. auto sales, according to estimates from Goldman Sachs.
     
     But how could these driverless cars impact the look of homes and
     communities? Homebuilders are already considering the impact.
     
     For example, KB Home and KTGY Architecture unveiled the KB Home ProjeKt
     this year at the Greenbuild Conference, which featured a home without a
     garage.
     
     “One of the biggest challenges will be to convince suburban municipalities
     that not all homes/home buyers will want or need a garage, or at least
     won’t need two spaces,” Gregg Nelson, co-founder of Trumark Homes, based in
     Newport Beach, Calif., told BUILDER. “The other challenge will be whether
     home buyers are willing to accept not having a garage, not only for their
     own use, but as a resale value question. Who will be those first
     buyers/early adopters? Who will take the first step of building a home
     without a garage?”
     
     Another change – and challenge – will be faced with a community’s roads and
     the transition to more driverless vehicles. How can self-driving cars and
     traditional cars coexist? Nelson speculates that the carpool lanes of today
     may become the autonomous vehicle lanes of the future.
     
     Five to 10 years from now, Nelson also foresees less need for internal
     roadways due to greater reliance on driverless cars. That could spawn
     greater walkable, open spaces in its place.
     
     “We should see a reduction in land area dedicated to parking,” Nelson says.
     “Studies show that roughly a third of urban real estate is devoted to
     parking garages, and that there are eight parking spaces for every car
     operating in the U.S. As time goes by, this ‘wasted’ space will be
     re-utilized in a way to enhance the environments of our communities.”
     
     * Woody says:
       November 22, 2016 at 10:16 pm
       
       UCLA did a study tracking the habits of families.
       
       http://newsroom.ucla.edu/releases/L-A-Region-s-Garages-and-Backyards-7649
       
       “Just six — or one-quarter — of the families tracked wereable to use
       their garage in the traditional manner by parking at least one carthere
       regularly. And of those, only three families parked both of the
       parents’vehicles in the garage. The other threefamilies were able to
       squeeze just a single car into the garage before turningthe remainder of
       the space over to storage.”
       
       * Woody says:
         November 22, 2016 at 10:25 pm
         
         This was a sample size of 32 families btw
       
         
       * Larry Roberts says:
         November 22, 2016 at 10:38 pm
         
         That matches my observations. I live in a community with garages
         serviced from an interior alley. Since the concrete on the garage apron
         is white, you can see if tires repeatedly enter the garage without
         having to see a car inside. Based on what I observed, less than half
         the garages ever had a car in them, and of those that do, most are only
         one car. I think my wife and I are the only people in the neighborhood
         that park both of our cars in the garage.
       
         
       
     
 7.  Larry Roberts says:
     November 22, 2016 at 4:29 pm
     
     The Autumn Revival: Home Sales Surge
     
     For the second consecutive month, existing-home sales were on the rise,
     ascending above June’s cyclical sales peak to become the highest annualized
     pace in nearly a decade, the National Association of REALTORS® reported
     Tuesday. All major regions across the country saw an increase last month.
     
     Total existing-home sales – which are completed transactions that include
     single-family homes, townhomes, condos, and co-ops – increased 2 percent to
     a seasonally adjusted annual rate of 5.60 million in October. The pace of
     existing-home sales is 5.9 percent higher than a year ago (5.29 million),
     rising above June’s pace of 5.57 million. It was the highest sales pace
     since February 2007.
     
     Lawrence Yun, NAR’s chief economist, is calling the sales increase an
     “autumn revival” for the housing market.
     
     “October’s strong sales gain was widespread throughout the country and can
     be attributed to the release of the unrealized pent-up demand that held
     back many would-be buyers over the summer because of tight supply,” Yun
     says. “Buyers are having more success lately despite low inventory and
     prices that continue to swiftly rise above incomes.”
     
     Further, the tightening labor market is pushing up wages and the economy is
     showing greater expansion, Yun says. “These two factors and low mortgage
     rates he kept buyer interest at an elevated level so far this fall,” he
     adds.

     
 8.  el O says:
     November 22, 2016 at 4:30 pm
     
     Mega market cap REIT aficionados continue to get crushed; reminding them
     that a 10,000lb interest rate gorilla can sit anywhere it wants to sit.
     
     
     
     
     
     
     
     
     
     * Carl says:
       November 22, 2016 at 4:43 pm
       
       I don’t actually understand these charts (besides the fact they are all
       obviously trending down). Can you provide some commentary?
       
       * Larry Roberts says:
         November 22, 2016 at 4:58 pm
         
         These are all real estate investment trusts. Most REITs are very
         leveraged, and in a rising interest rate environment, their costs
         escalate much more quickly than their income rises, so they become far
         less profitable. Investors know this, so they are heading for the exit
         in anticipation of rising rates.
       
         
       
     
 9.  el O says:
     November 22, 2016 at 5:33 pm
     
     In calculating profit, the most important element homeowners and
     amateur-hour RE investors et-al chose to ignore:
     
     adjusting for actual inflation (not .gov understated cp-i).
     
     Adjust to cp-i, and you’re writing the word ‘delusional’ across your
     forehead in bright red ink.
     
     * Larry Roberts says:
       November 22, 2016 at 9:41 pm
       
       I didn’t mention that in the analysis, but it’s also a good point. Real
       estate investors like to consider the inflation of rent, but they neglect
       to factor in that rents generally rise with wage inflation, so while
       their net may improve on a nominal basis, if adjusted for inflation, the
       net is tiny, if there is a net at all.
     
       
     
 10. Michael says:
     November 22, 2016 at 5:35 pm
     
     Those REIT trends are a nice precursor to where housing prices are headed

     




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