Somebody You Need To Read

I want to pass along a blog site that everybody ought to read from time to time. It's James Thorner's site, www.blogs.tampabay.com/realestate. Thorner, in case you don't already know, writes a column called (Un)Real Estate for the St. Petersburg Times. Both the blog and the newpaper column are always interesting, informative and factual -- or at least as factual as you can be given the ups and downs of real estate today.

What I like about Thorner is that he approaches things like a trained news reporter -- A/K/A a journalist. He looks at the facts, attempts to put them into proper perspective and tells you what the facts really mean and how they might affect you if you are a buyer or seller. That's important. That's worthwhile.

Now, I'm not going to say that I always agree with what James Thorner writes or the conclusions that he draws, but most of the time I think he's right on the money. He's certainly a lot closer to being correct than those who have been saying that "there is no real estate bubble", "the market has bottomed out", and that real estate activity will improve "right after the next election", "right after the special session", "right after the first of the year", or "right after hell finishes freezing over".

Keep up the good work, James!

For more information on real estate in the Tampa Bay area, visit my website at http://www.thestpeterealestatesite.com/.

-30-

What's Selling In Pinellas County?

It's fun to have a big sale. Nothing like getting that "big deal" to close. Right? Right.

Thing is, big deals may not be where it's at in real estate anymore in Pinellas County.

During the month of August, 2007, those luxury single-family homes costing over $700,000 accounted for only 3.89% of residential sales in the county. By contrast, properties selling for $200,000 to $400,000 represented 46.67% of the county's sales.

Here's the breakout by price category ...

$99,999 or less: 8.34%
$100,000 to $199,999: 35.74%
$200,000 to $299,999: 26.30%
$300,000 to $399,999: 12.78%
$400,000 to $499,999: 7.59%
$500,000 to $599,999: 3.15%
$600,000 to $699,999: 2.22%
$700,000 to $799,999: 0.93%
$800,000 to $899,999: 0.37%
$900,000 to $999,999: 0.74%
$1,000,000 and up: 1.85%

Seems like most of the real estate action is from $100,000 to $400,000 doesn't it?

For more information on real estate in Pinellas County, visit my website at http://www.thestpeterealestatesite.com/.

-30-

August Sales Figures Show Nothing New -- Perhaps That's An Improvement!

The only thing you can say about the August real estate sales figures for Pinellas County is that nothing much happened. These days, that might be an improvement!

The Absorption Rate (AR) as you know is calculated by dividing the number of units sold in the month by the total number of units listed for sale in the Multiple Listing Service (MLS). In August, the AR for single family homes was 5.9% -- exactly the same as it was in July. For condos the AR for August was 3.7% -- and that is the same as it was in July. So, no gains from a percentage standpoint. But no losses either!

Single Family Figures

During August there were 9,141 single family homes listed for sale in the MLS. In July there were 9,198. Although this amounts to a reduction of only 57 fewer homes on the market, I consider any reduction in inventory a positive sign.

Don't get the impression that this reduction in inventory came as a result of sales. It didn't. In August the MLS reports 540 single family sales as compared to 541 sales in July. As you can see, there may be a few fewer homes on the market now, but it's not because sales suddenly got hot.

What's more, it appears that buyers are going more for lower priced houses. The median sale price dropped to $219,900 in August as compared to $225,000 in July.

Condo Figures

It seems like a fairy tale now, but once upon a time condos were big in Pinellas County. Today, not so much.

In August the MLS reports that there were 8,464 condos for sale. The good news is that in July there were 8,614 for sale. So, that's a net drop of 150 condo listings in the past 30 days. As I wrote earlier, I think any drop in inventory has to be viewed as being positive.

Condo sales, however, didn't do much in August as compared to July. In August there were 311 condo sales as compared to 319 in July. So, condo sales remain pretty flat and are not the cause for the reduction in inventory unless no other condos were listed in August.

What is disappointing about condo sales is that the median price really fell a lot in August, indicating that what market there is for condos seems to be in the lower priced units. The August median price fell to $156,000 from July's $175,000 -- quite a drop in only 30 days. I wonder if there's a reason for this?

So, I see some positive signs in that things did not appear to get any worse during August despite a lot of bad news about real estate and mortgages in the media. Is this the beginning of a real estate turnaround? C'mon, let's not go overboard. The stars are still out of alignment.

For more information about real estate in the Tampa Bay area, visit my website at http://www.thestpeterealestatesite.com/.

-30-

So, How Much Is That Investment Property Worth Today?

Recently, I have had opportunities to speak with several owners of investment properties in the Tampa Bay area. All of these investor-owners purchased their duplexes, triplexes and apartment buildings during 2004 and 2005, and now they want to sell them in 2007 and hoped to double or triple their money.

I guess they don't believe what the newspaper is printing, or think the news does not apply to them.

My unpleasant assignment has been to snap them back into reality -- a thankless task, I assure you.

The mistake that these owners of income-producing properties have all made is one common to amateur real estate investors. They approached ownership of an income producing building as if it was a single-family home. They made improvements -- tile floors in all the apartments, granite counter tops in kitchens and baths, lavish kitchen appliances and so forth. One fellow even built a wet bar into one of the units. Another added jetted bathtubs.

These kinds of improvements are great if you're selling a single-family home where the new buyer will ultimately live in the property and will appreciate all those nice things you did to upgrade the home. The buyer will generally pay you more money for a house with all those wonderful luxuries.

A professional investor, however, probably won't give you one red cent more for a building with all that new stuff in it. In fact, he'll wonder why in the world you spent all that money unless the upgrades actually resulted in higher rents and increased annual profit on the building.

If you are selling an income producing property you need to keep in mind that you are not selling a building at all. You are really selling a future income stream to an investor. As such, the only thing the investor wants to know is how much return he will receive from buying your building. Real estate investors are primarily concerned with the calculations which prove a property's value in relation to its cash flow, and they will purchase property only if it is self-supporting and delivers an acceptable return on investment (ROI).

The Mistake

Most investors and many real estate agents treat investment-grade property as if it was ordinary residential property. In determining value for resale, they do a Comparative Market Analysis (CMA) and attempt to compare the subject property to the known selling price of similar properties. Sometimes they even go so far as to make a value determination based on the selling price per square foot of similar properties.

That's a mistake. No two properties are exactly alike, and they probably do not have equal income streams and net profits. And since the value determination is based on pure arithmetic, you can not make any adjustments to rental dollars delivered annually. In other words, you can't adjust one income stream from building "A" to somehow match the income stream from building "B" because dollars are always dollars and there is nothing to adjust.

Determining Value

The value of income producing property -- especially commercial property of 5 rental units or more -- must be determined using two mathematical formulas called "The Stack" and "IRV".

What's disappointing is that all real estate agents in Florida learned these two methods when they earned their real estate license. They just don't use the technique much, and if you don't use it you lose it. So, they fall back on doing CMA's and trying to adjust values by comparing one property to another, and that just doesn't work for reasons mentioned above.

The stack is very simple. You calculate the Potential Gross Income of your building annually by adding up all the rent as if you had 100% occupancy all year. You then deduct about 7% of that figure for vacancy and collection losses, then add in any additional income earned by the building (for a laundry, parking fees, cola machines or whatever). This gives you the building's Effective Gross Income.

From the Effective Gross Income you must deduct the operating expenses of the building. Operating expenses include mowing the grass, general repairs, and those darn property taxes among other things. Once you have made these deductions, you have the Net Operating Income (NOI) of the building.

NOI is the figure professional investors really want to look at and analyze. Your calculations must be accurate and not fudged. Fudging NOI figures may lead you to a lawsuit. Frankly, some of these serious investor-type people take a real dim view of fudging NOI figures.

The next thing professional investors do is calculate the value of your building by taking the NOI and dividing it by a Capitalization Rate, or Cap Rate. The cap rate varies from investor to investor. Essentially, the cap rate is how much profit, expressed as a percentage, that an investor wants to make on his money. Some people want cap rates of 10%, some people want 20%, others will settle for a lot less.

Today, I'm hearing that investors will generally consider buying a building if the cap rate is more than they can make by investing in bank certificates of deposit. So, that would mean investors are looking for caps of about 6% to 8%, and 7% seems to be a popular number.

So, to determine the value of the building you apply the second math formula -- the IRV formula. In this formula "I" stands for the Net Operating Income. "R" stands for the Capitalization Rate. "V" stands for the value of the property. You simply divide the NOI by the cap rate and you get the value of the building. Essentially, this formula tells an investor how much he can pay for your building based on its NOI and the cap rate he wants to earn on his money.

So, if you own an income producing building and you want to sell it for a bundle, you need to get your NOI as high as possible before putting it on the market. This generally means that you need to pump-up the rent and cut down on the expenses -- and stop doing remodeling that does not increase the rent flow but does increase the overhead against the building.

You can almost always tell when a landlord is thinking about selling his investment property. About a year to eighteen months ahead of selling, he starts pumping up the rents until his tenants are crying the blues and close to leaving. That's when he's got the rents right for re-sale. He then calculates the NOI and determines the asking price by dividing the NOI by an acceptable cap rate. The rest is just a matter of finding a ready, willing and able buyer.

If you own multi-unit investment property and are thinking about selling it, I urge you to consider the approaches described in this little story. It may not result in giving you the selling price you hoped for, but it will give you a realistic figure with which to go to the market. Without a realistic figure, your property will sit unsold for months on end because your income-stream will not entice any investors to make an offer.

For more information about the real estate market in Tampa Bay, visit my website at http://www.thestpeterealestatesite.com/.

-30-

A Week With The St. Petersburg Times

It seems like everybody has picked up some negative vibes regarding real estate.

Sellers are discouraged about the prospects of selling their property because there are few buyers willing to "meet their price". Buyers are sitting on the sidelines waiting for sellers to volunteer to lower prices. Real estate agents, mortgage brokers, title companies, home inspection services, property appraisers, real estate schools and everybody else associated with the real estate business is seeing a fall-off in business and many have changed careers.

Gadzooks! It's no wonder everybody's depressed.

And why shouldn't they be? Bad real estate news is just about all the news you get from the local paper, the St. Petersburg Times.

This past week, I decided to keep and summarize every article that the Times ran about real estate just to show you how the paper might be having a negative impact on people's mental outlook regarding the business. If you can find anything to make you feel positive, let me know ...

Sunday, August 26, 2007

In the Money section, we learn about two real estate agents in Clearwater who specialize in high end properties, Liz Seither and Anthony Marottoli. We learned that Liz is balancing calls from prospects with other calls from creditors regarding her unpaid bills but, in her own words, she is "not a real estate bum. I wear diamonds, Rolexes and necklaces. I'm a classy Realtor."

Later in the article we learned that Anthony (the "listing machine") was trying to flip condos for big profits and got caught in a slow market with unmoveable units in the million dollar range. "I've been waiting a year and a half ... And it's not happening," said Marottoli.

The article goes on to say that these days the "waterfront runs red", "properties linger three times on the market as they did two years ago", and that agents like Seither and Marottoli take it doubly hard because they don't have buyer and seller clients like they once did, and their personal investments are on the rocks.

I want to know something. Why on earth would these two people want their professional and personal financial problems exposed for the world to read about in the St. Petersburg Times? If it was me, I'd be so embarrased I'd probably move to another city. And why would the Times think that the plight of these two people is so important that it was necessary to run such an article?

Tuesday, August 28, 2007

In the Business section we learned that "Home sales, prices tumble" and that "The slump, the worst in 16 years, is predicted to worsen." The article goes on to say that sales of existing homes dropped in July for the fifth straight month while the number of unsold homes reached record levels. In the Tampa Bay area, single-family home sales slid 28 percent for the year ended in July 2007. Great! Real positive stuff.

There was a second article that day that was aimed directly at Countrywide Home Loans. The story told how Countrywide's pay structure fed aggressive sales tactics. The article said that while Countrywide sales people said they were putting clients into the best possible type of mortgage, "potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide's smooth-talking sales force". Hmmm ... well, if you can't trust your banker who can you trust?

Wednesday, August 29, 2007

The Times reported that Nationwide Insurance plans to drop 39,000 homeowner policies in Florida and 1,600 commercial policies as they come up for renewal in January. This kind of story just makes people even more skitterish about buying real estate.

But wait! There's a second shot across real estate's bow when the Times printed a story about "Hidden mortgage debt a threat" and that "Nonbank lenders' problems are hard to gauge". The opening sentence to this story? Get a load of this: "It's hard to know how scared to be if you don't know the size of the threat. No, not terrorism -- housing." The article goes on to scare the dickens out of me when it says that because of a lack of oversight, the number of failing lenders is unclear. If I was a potential home buyer, this kind of story would not fill me with confidence to go forward with my real estate lender. After all, can I trust them?

Thursday, August 30, 2007

Okay, so far this week the Times has taken shots at residential real estate, insurance companies and mortgages. But the Times is an equal opportunity offender!

On this date in The Insider section, they ran a story headlined "Commercial real estate, come on down. You're next." The opening paragraph? "Here's the next shoe to drop as a result of the bursting of the credit bubble: commercial real estate." You probably get the idea of the rest of the article. After all, why shouldn't commercial real estate fall into the same slump as residential real estate ? And it will if the Times has anything to say about it. And they will!

Wait! Wait! Here's a bone for all who keep saying they are seeing increased activity in the real estate markets. The Times ran a tiny little one paragraph sidebar story in the Business section that reported on a 7% uptick in sales in Sarasota, this year over last year. Of course, that was tempered with opening comments about how far down the Sarasota market fell last year, so the implication is that the only way to go is up and to move upward 7% over such a crummy previous year doesn't really mean all that much -- or so the Times would have you believe. And to throw a little more water on some hot news the Times ended the story with this little ditty ... "If (Sarasota) is now pulling out of its tailspin, Tampa and St. Petersburg might follow in relatively short order. At least that's the optimists' view." The optimists view indeed. That 7% uptick is big news! Why didn't the Times run a big story about it? They run big stories about every bit of bad news. How 'bout making a bit of a big deal out of some good news? But no, that's not the Times style. That wouldn't be journalistically ethical.

Friday, August 31, 2007

Three articles designed to poke holes in the real estate boat today.

The first story on the Business section is headlined "Promise or a pipe dream?" "Insurers' filings seek an average 28.2% increase." Now, we all know that high property taxes and high insurance premiums are two of the four stars that are out of alignnment and are causing the real estate problems in Florida. This article talks about how insurance companies have ignored the state's new laws which once promised all of us an average rate reduction of 24 percent this year. That ain't happenin'. So, if I was a buyer, this article would make me even more reluctant to go out and make an offer on a new home. This isn't necessarily the Times fault, it's just the news.

The sidebar story is the Times at it's best. The headline? "Citizens comercial rates may nearly triple". This seems to tie right back to the August 30th article about commercial real estate being the next bubble to burst, doesn't it? And remember, we're talking about the power of the press. If you want a recession, a war, a depression, a stock market cirsis, a whatever ... just let the press start grinding on it and you'll have it.

But today's real estate news isn't over yet. In today's second story we learn that "Investors increasingly walk out on mortgages" and that "Florida is among the delinquency leaders." Of course Florida is among the delinquency leaders. We are also among the leaders in investor purchases of real estate! The more investors, the more likely you are of delinquencies. Duh.

The third and final story on this day involves two of my friends, Glen and Jody Tutt. The headline is "Tiptoe carefully on lenders' graveyards" and it reports on an incident in which Jody, who owns Southern Title Services in Seminole, found herself in the position of having to make good on checks issued by her company when Homebanc bellied-up. Jody had just closed a $500,000 home and had issued closing checks totalling $416,000 based on an OK from Homebanc. As the closing agent, she had to make good on those checks even though Homebanc wouldn't. Hopefully, all will turn out okay for the Tutts. But this is another case of the newspaper keying on something bad that happened in the world of real estate. Why not write an article about all the people who were served well by their lender, agent, title company, insurance company and all others who have a hand in closing a sale? But no, that's not news -- it would make for dull reading.

Saturday, September 1, 2007

My week with the Times comes to an end on Section A with the news that President Bush is offering housing help. In all fairness, this was pretty good reporting on a news event by Helen Huntley. Helen points out that the help is very limited and targets only certain homeowners -- mostly those who have good credit and are not in danger of foreclosure. It can be argued that the help is available only for those who needed it the least, and that those in the deepest trouble can expect no assistance from the government. But then, why should the taxpayers bail out financially irresponsible people? Overall, a good job of reporting.

So, there you have it. A week looking at the Times coverage of real estate-related issues. Is it balanced? Is it honest? Or does it use sad facts to sensationalize the news and thereby potentially prolong a growing financial crisis in the area and country? You be the judge.

For more information on real estate in the Tampa Bay area, please visit my website at http://www.thestpeterealestatesite.com/.

-30-

What We Want In A House

Between late 2005 and early 2007, the National Association of Realtors conducted a survey of new home and resale buyers to see what kind of homes Americans buy and how those homes need to be outfitted. Here are the results ...

• The typical home had 3 bedrooms, 2 baths and was 1,840 square feet. The house was one story and about 12 years old. Median price was $205,000.
• The top features included central air conditioning, garage, walk-in master closet, back yard with play area and -- reflecting the age in which we now live -- high speed internet access.
• Here's what we can do without: air and water filtration systems, extra-wide doorways, wet bars, central vacuums, and intercoms.
• Buyers appear to be willing to pay extra for hardwood floors, high-end kitchen appliances, granite countertops, porches, and fireplaces.
• We want homes to be near schools, shopping, parks/playgrounds, restaurants, work, cultural activites and golf courses.

It would be kinda nice to find a house with all those features and priced at only $205,000, wouldn't it?

For more information on real estate in the Tampa Bay area, visit my website at http://www.thestpeterealestatesite.com/.

-30-