Monday, October 30, 2006
The Extent Of Ownership
When buying and subsequently owning real property, how far does ownership really go? Find out ...
The Law of real property in North America finds its roots and origin in the Law of England. When the early settlers arrived, they brought along their own version of English Law, that is English Law was applicable so long as local circumstances allowed. Modifications to the original Law were then brought forth by force of adaptation to the life in the new continent, the integration in the new evolving societies of non-English people and, finally, by war and the political events of the time. As a direct and proximate result there have been numerous statutory developments to the Law of Real Property, so that Real Estate Law in North America is substantially different today from that of England in a number of relevant respects.
It is important to distinguish between two types of property, namely a) land and real property and b) personal property. Historically real actions could be taken in the courts in respect of land, and personal actions could be taken in respect of other types of property. Real property consists generally of land and whatever is erected, growing upon or otherwise affixed to the land. This includes also the rights related to the land.
Notwithstanding the common denominator and origin within English Law, however, in Canada - as opposed to the United States - the application of English Law has inherited one of its fundamental concepts: the land itself is not owned. This is so because English Law focused not on ownership of land but, rather, on possession of it. The result is that the land itself is not owned or otherwise subject to ownership. Instead the person who has the right of possession is entitled to exercise certain proprietary rights over the land. The only one thing that is subject to ownership is an "estate" in the land.
An "estate" is an abstract legal concept that can be best characterized as a "bundle of rights". In other words, the owner of an estate has certain rights he can exercise over the land. These rights are limited in nature and are encapsulated at Common Law in the Doctrine of Estates. Estates still in existence today are the Fee Simple Estate, Life Estate and Life Estate Pur Autre Vie.
The holding of a Fee Simple Estate is the largest interest one can have in land. To better understand what this type of ‘ownership' entails, two issues must be considered. First, what rights does a Fee Simple owner have over the ground under his property or the air over his property. Secondly, as the land includes what is ‘affixed' to it, one must determine what constitutes a "fixture".
At Common Law the theory was that one owned his land all the way down to the center of the Earth, as well as all the way up to the heavens. The second concept has been modified, so that one now owns or has rights in the airspace above his property only to the extent that he can make effective use of it. And even this modification is altered by statutes. For example, the Federal Aviation Act (in Canada) and similar statutes in the United States allow an aircraft to pass through the airspace without liability for lawsuits if no physical damage results.
The subsurface rights of a landowner have also been reduced, mainly by Provincial or State governments which have reserved most of the precious minerals, metals, gas and petroleum products for their own use. Specifically as it regards British Columbia, one must trace the title deeds back to the original grants from the Crown (and subsequent legislations and amendments), in order to determine the exact rights in the subsoil. For example, gold and silver were originally reserved in favour of the Crown. Since 1897, however, all base minerals other than coal have been expressly reserved. Coal and petroleum have been reserved since 1899 and gas since 1951. The statutory authorities for making these reservations have now been collected into Section 47 of the Land Title Act Of British Columbia (as amended).
Additionally, since the Crown is the absolute owner of properties in the physical sense, it may expropriate for a wide range of purposes. Usually, any expropriation is accompanied by compensation to persons whose property is taken away, but this is not always the case. For example, under Section 23 of the Land Title Act Of British Columbia the beds under bodies of water were appropriated by the Provincial Government without provision for compensation. Therefore, the Crown reserves to itself many rights, so that one property rights in land can be limited a great deal.
Further limitations can be imposed by municipalities, as in the case of subdivisions. Municipalities have the right to require any person or entity involved into the subdivision of land to provide for and construct streets, sidewalks, sewers, water lines and highways. Of course, this power is not as wide as that retained by the Crown, because the power of municipalities only arises where there is a subdivision of land.
As to determination of what constitutes a "fixture", questions often arise - particularly when land is being bought and sold - as to whether items such as flowers, shrubs, tapestries, wall-to-wall carpeting, chandeliers, television antennae and the likes are fixtures, and therefore part of the real property, or whether they are in fact chattels, and therefore can be removed. This decision determines if an item passes to the new Purchaser or if the Seller can take it when he vacates.
To settle this matter, the courts have established a series of tests to be applied in the circumstances of each case, as follows:
[ ] Items attached to the land only by their own weight are not to be considered part of the land, unless the circumstances show that they were intended to be part of the land.
[ ] Items affixed to the land even slightly are to be considered part of the land, unless the circumstances show that they were intended to be chattels.
[ ] The circumstances necessary to alter the original decision in the two foregoing tests are those which, on inspection, will clearly show the degree to which the item was affixed or attached, as well as the obvious intent for doing so.
[ ] The intention of the person affixing the item to the land is relevant only if it can be presumed from the inspection.
[ ] Even fixtures installed by tenants for the purpose of carrying out their businesses form part of the land. However the tenant has the right, as between himself and the landlord, to turn these items back into chattels by severing them from the land. Therefore, where a property is sold, the tenant's fixtures pass to the Purchaser as part of the land subject to this right of the tenant.
It is clear that the foregoing tests are difficult to apply in any given circumstance. For this reason, it is to everyone's benefit to specify in writing in the Contract Of Purchase And Sale whether or not any items in dispute will pass with the property. By expressly agreeing between themselves, the parties can avoid this Common Law principles and the aggravation that a decision rendered by a court may bring upon one of the contracting parties.
Real Estate Chronicle
Friday, October 27, 2006
Real Estate Market Timing
After Pinocchio and Cinderella, Real Estate Market Timing is my third preferred fairy tale. I like it so much, in fact, that I wanted to share it with my readers – thus this Post.
The United States, Canada and all other modern industrial economies experience significant swings in economic activity. In some years most industries are booming and unemployment is low; in other years most industries are operating well below capacity and unemployment is high. Periods of economic expansion are typically called booms; periods of economic decline are called recessions or depressions. The combination of booms and recessions, the ebb and flow of economic activity, is called the economic cycle.
Of all the industries contained in the economic basket of goods and services, Real Estate is the one that is particularly susceptible to the ups and downs of economic cycles simply because it is a big ticket industry. It is therefore important for all those involved into real estate investing, to try to anticipate market movements in order to maximize profits and optimize performance. This is, in fact, the textbook definition of market timing. Market timing means buying low and selling high, and we all know that this is the key to successful investing.
So, therefore, market timing is logical. It is also deceptively simple - buy properties when prices are low, and sell them when prices are high. Unfortunately, however, in many ways the term "economic cycle" is misleading. "Cycle" seems to imply that there is some regularity in the timing and duration of upswings and downswings of economic activity. This could not be farther from the truth, especially in Real Estate. Booms and recessions occur at irregular intervals and last for varying lengths of time. For example, economic activity hit low points in 1975, 1980, and 1982. The 1982 trough was then followed by eight years of uninterrupted expansion. For describing the swings in economic activity, therefore, most modern economists prefer the term "economic fluctuations".
Just as there is no regularity in the timing of economic fluctuations, there is no reason why fluctuations have to occur at all. Thus, predicting market timing in Real Estate is similar to planning a vacation trip to Hawaii, in January. All the brochures say the sun shines all the time but somehow, when one lands in Honolulu, he is greeted by a hurricane. Despite the fact that successful market timing may be even more difficult to predict than the weather, everyone wants to try, to some degree. Buy houses when they increase in value, and sell them when they begin to decline. Keep your cash holdings as a safe haven when you are not sure.
Regrettably, there is no guaranteed way to anticipate market movements, so attempts to clock market timing fail to deliver optimum results. And this is true of the small investor as it is for, well ... the Chairman of the Federal Reserve System. Had market participants listened to Alan Greenspan, the Maestro, when he first started talking about the dreaded real estate market bubble all the way back in December 2001, those same investors would have missed out on an appreciation of real property values that averaged 15 percent per year from 2002 through 2005 inclusive.
As much as fluctuations are difficult to predict and that, as a direct and proximate result, the market is next to impossible to be timed, fluctuations do occur, however, because there are disturbances in the economy of one sort or another. The quintessential cause of recessions and booms in real estate is monetary policy. The central banks determine the size and growth rate of the money stock and, thus, the level of interest rates. By raising or lowering interest rates, the central banks are then able to generate recessions or booms. This is the reason why keeping a close eye on interest rates is so crucial in Real Estate.
So therefore, because of the fact that fluctuations do happen, with perfect 20/20 hindsight I can tell everybody precisely when a market turnaround has occurred. Furthermore, if I look back far enough I may even see patterns to the movements of the market, which repeat themselves sufficiently often so as to convince me that they will occur again, given the same conditions, at some ‘predictable' later date. This is, in fact, the principle upon which computer programs at the Federal Reserve System work: they analyze market patterns and try to anticipate major trends to come. Computer modelling, as it is called, is employed nowadays in practically every industry. But notwithstanding all technological advances, no one has ever been able to anticipate market or economic swings with an accurate and acceptable level of consistency.
So the academic debate continues. Those who do not believe in market timing challenge not only the ability to anticipate market movements, but also the rationale behind market timing. Conversely, advocates of market timing are quick to point out that one can obviously maximize returns in a rising market and minimize losses when the market begins to decline. And in so doing, they pore over their charts and computer printouts looking for signals that the time is right to buy or sell, based upon a combination of factors that have preceded a change of market momentum in the past.
The Efficient Market Theory suggests that prices often exhibit random walk behavior, and thus cannot be predicted with consistency. In Finance, the Efficient Market Hypothesis (EMH) asserts that financial markets are "efficient", or that prices on traded assets, e.g. stocks, bonds, or real property, already reflect all known information and therefore are unbiased in the sense that they reflect the collective beliefs of all investors about future prospects. EMH, furthermore, implies that it is not possible to consistently outperform the market - appropriately adjusted for risk - by using any information that the market already knows, except through luck or - as in the case of stock markets - obtaining and trading on inside information.
And bear in mind that market timers have to be right in their predictions not once, but at least twice in a row. They also have to exit the market with consistency just before the downwards spiral begins.They have to be adept at identifying peaks and valleys as they are occurring, not after the fact. Sometimes what looks like a downturn is just a temporary resting place - as it seems more and more to be the case in Real Estate today. Also, there are those investors who simply take the contrarian approach and start buying when everybody else is selling. They then take their profits when others are busy buying.
The untold secret of real estate investing is always to buy and never to sell. That is the guaranteed path to wealth. As this, however, is not always possible, the second best alternative is to act when one's own circumstances warrant, without paying much attention to the cycles that may or may not take place.
Real Estate Chronicle
Tuesday, October 24, 2006
The ABC Of Condo Buying
If purchasing an apartment is in your cards, read this Article filled with professional advices authored by a veteran Real Estate Agent of nineteen years, five-year Strata Council Member, two-year Strata Council Vice-President and two-year President (... that would be me ...).
Combining the advantages of apartment occupancy with those of home ownership has long been a dream of urban dwellers. But there are times, however, when dreams turn into nightmares. Throughout my plurannual Real Estate career, I think I have seen my fair share of horror stories when it comes to people who bought apartment units. So much so, in fact, that I have decided to lay out in brief the foundations of condo-buying, which every responsible and prudent condominium Purchaser should always follow, irrespective of price, location and taste.
Here we go:
[ ] Strata Documentation: Read It Like The Bible
Why? Because it is your Bible, as a condo-purchaser. Yes, the law says that your Agent, during the course of the fulfillment of his/her duties, is responsible for reading all the Minutes, reports, bylaws, condominium rules, the Strata regulations ... and raise all sorts of red flags, should something not be the way it is supposed to be. Which is all very fine, fair and dandy. But in practicality, it is you the one that will move in, come Possession Date, not your Agent.
You may discover things that your Agent is not under any obligation to disclose, and which nevertheless will have an impact on the quiet possession and enjoyment of the unit you are set to buy. For example, you may find out that the owner next door has been fined repeatedly for playing the drums at midnight. Or that the fellow two floors up has this habit of tossing cigarette butts out the window, which will invariably land on your balcony. Or that there is no clothes washing and drying allowed from 7:00 p.m. to 7:00 a.m. Even an unusual number of noise complaints involving stereo and television sets will affect the quality of life in your new apartment.
When you move in and make the place you bought your home, it is the little things that count, not the legal garble - as much as that is also very important. So, if you discover that hanging red drapes is forbidden and you are just so crazy for red drapes - well, you may want to think twice about finalizing the purchase.
[ ] Do Condos Need Inspections? You Betcha!
In fact I am always fond of telling my Clients that condos need triple inspections: the ordinary professional home inspection to cover the elements of the unit you are about to purchase, such as electrical system, plumbing and heating components. The extraordinary professional inspection to establish the condition of the exterior upkeep of the building, roof, basement, recreational facilities if any, parking and storage areas and ventilation system as well as fire exits and hallways. Your own inspection of the building envelope and rainscreen, if any, by going through and understanding all Strata Minutes and Engineering reports commissioned by Strata, and by having your Agent do exactly the same.
It must be remembered that a strata development consists of strata lots, common property and common assets. Every strata owner owns a proportionate interest in the common property and common assets of the strata corporation. The owner cannot separate his or her interest in the strata lot from the proportionate interest in the common property and common assets, which means that the owner is liable for their maintenance, upkeep and eventual replacement. So therefore, get a professional to inspect them all.
[ ] Stay Away From High-Rent Developments
If you buy a house, you want to make sure that your neighbourhood is made up of people like you, who really make a commitment to the upkeep of their homes and to maintain the safety of the streets. This is the reason why it is not the best idea in the world to move into a street where most homes are rented. The same goes for condos.
When buying into a condo development, find out the ‘rental rate', that is the percentage of units that are rented out. The higher the percentage, the more concerned you should be. This is so, because the more tenants - and landlord/owners - there are in the building, the fewer people you will see willing to pitch in for long term improvements and ameliorations which, in ultimate analysis, will be counterproductive to the appreciation and stability of your investment.
If the rental rate is over 50 percent, do yourself a favour: go buy somewhere else.
[ ] Share As Few Walls As Possible
The rule of thumb in residential condominiums purchasing is that the more walls you share with other units, the more you will feel like being on Main Street on the Fourth of July - every single day for the rest of your life. The same goes for the floor and ceiling. It is going to be quieter, much quieter, to have only someone below you than to have people above and below you. This is the reason why corner suites are usually more expensive, and why top floor corner suites are ‘la crème de la crème'.
[ ] Check For Signs Of Aging
Old apartment buildings can be charming indeed, especially when the new high-rises look like big blob of concrete to you. But there are times when the old fashioned ‘character' can put you all the way back to prehistory, at the time when Homo was scavenging and foraging in the high plains of the East African savannah. Alright, I confess - I am not the ‘character' type of buyer, as I like everything new and ultra modern. However, if you are entertaining the idea of taking a leap into prehistory and buying a condo in an old apartment building, check for signs of dilapidation such as crumbling walls or roof, as well as verify whether the heating, cooling and ventilation systems are regularly serviced. If they are not, you may soon be paying extra monthly maintenance fees to fix breakdowns.
And do not disturb the ghost ...
Real Estate Chronicle
Saturday, October 21, 2006
Sex And Real Estate
"There is no point in being rich, unless you can have sex with beautiful women"[Aristotle Onassis]. Post rated 18+ ... (just kidding).
The most sophisticated way of establishing rank order so far devised by humans is by means of wealth, in all its manifestations. To be sure, there are many other activities endeavoured by mankind such as warfare, politics, organised religion, bureaucracy, sport, artistic fame, entertainment, and even who wears the trousers in marriage but the quest for wealth has the most potential for either widespread prosperity or disaster. Humans have even dedicated an entire discipline to the study of the origin and interaction of wealth and abundance with their opposites, poverty and scarcity: the Science of Economics.
Economics, therefore, is best studied by watching what happens to wealth. And the economic discipline best suited to watch wealth, in Capitalism, is that where wealth is primarily created and consumed on a daily basis: Real Estate. This is so, because real estate location and selection - particularly when it comes to residential units - are the main social markers of status. Real Estate is more important, far more important for establishing rank within society than the other competing field where wealth is created and consumed: the Stock Market. One can own the largest single package of IBM's shares, and still the impact on his peers will not be as dramatic as the one of living ostentatiously in a multi-million dollar mansion.
Moreover it can be added that although establishing rank order by means of wealth manifestations is common to all societies everywhere on the planet, in North America specifically this peculiarity unique to the human progeny has taken a somewhat overzealous connotation, by combining the twin concepts of the saga of the self-made man or woman and the fantasy of home ownership. America's love affair with houses is the principal indicator of our cultural idolatries.
This concept is indeed fully and clearly conceptualized by Prof. Marjorie Garber, the Director of the Humanities Center at Harvard University, in her book entitled Sex and Real Estate: Why We Love Houses. From the opening paragraph her thesis is clear: real estate has become a relational substitute in the lives of many Americans. She begins, "What do college students talk about with their roommates? Sex. Twenty years later, what do they talk about with their friends and associates? Real estate. And with the same gleam in the eyes. Real estate today has become a form of yuppie pornography".
The connection between sex and real estate, two fields otherwise light-years apart, is made to the extent that they both serve and satisfy status rank to its best fulfillment through wealth. This is indicated and summarized by a somewhat blunt quotation of Aristotle Onassis, the Greek shipping magnate who married two of the most famous women in the modern world - Maria Callas, the opera diva, and Jacqueline Kennedy, the widow of US President John F. Kennedy - who died in 1975, when he said "There is no point in being rich unless you can have sex with beautiful women." So when we are talking about the male urge for status rank, or the female urge for a dependable partner who will give her financial security and good progeny, we are really talking about two facets of the same concept: wealth. On the other hand, as humans tend to equate values, when it comes to housing and real estate, the equation is:
achievement + independence + comfort + prosperity + accomplishment + success = wealth
There is so much money around, and buyers want to flaunt it. They will swear and they will protest and say they do not want to show off, but they do. They want a house that makes a clear, undeniable statement that ‘I am rich', ‘I have prosperity' and ‘I have style'. Architectural styles of new constructions are changing and evolving, with the ever increasing round looks of exteriors that reflect feminine sensuality and the use of glazed windows and conspicuous steel beams - male machismo at its best. On the inside, the skillful blend of colors, woods and design elements promotes feminine harmony, warmth and balance with char green, sand, white, red, black, dark brown and all colors of nature at the top of the line whereas, if contemplating a hardwood floor, mahogany is the wood of choice since it enriches the environment by rendering a sense of abundance, and slate flooring and polished concrete walls help create a natural masculine feeling, especially if combined and contrasted with the glacial looks of stainless steel appliances.
The link between sex and real estate is the catalyst to emotional engagement, as important in our social interactions of status and rank as it is in our manifestations of wealth.
Real Estate Chronicle
Tuesday, October 17, 2006
The Philosophy Of The Long-Term Achievers
Detailing the process of wealth accumulation in any real estate market.
Historical data relating to the appreciation of real estate property values throughout the years has always been very comforting. In fact, housing has appreciated consistently an average of 7.5 percent per year over the past 30 years in Canada [source: Canadian real Estate Association], and an average of 7 percent per year in the United States over the same span of time [source: National Association of Realtors]. Which goes a long way to prove how sound real estate is as a wealth-generating vehicle, notwithstanding the several ups and downs the industry has gone through in both countries.
The economic explanation of this brilliant and consistent track record is relatively simple. Housing supply is produced using land, labor, and various inputs such as electricity and building materials, with the quantity of new supply determined by the cost of these inputs, the price of the existing stock of houses, and the technology of production. As real estate is a fixed and durable commodity and the land underneath is practically indestructible, real estate markets are modeled as a stock-over-flow market. About 98 percent of supply consists of the stock of existing houses, while about 2 percent consists of the flow of new development.
What drives the accumulation of wealth in real estate is the perpetual search for more surplus-value, that is the amount of the increase in the value of capital upon investment, i.e. the yield regardless of source or form. This is by no means unique only to real estate, as stock markets spin around the same principle as well. The difference, however, consists in the fact that real estate markets employ one economic variable that is entirely missing from stock markets: labor.
Real estate requires a constant supply of labor force, which can conserve and add value to inputs and capital assets, and thus create a higher value. The rationale behind this is that labor adds value by satisfying demand through production, since when people acquire income they tend to invest it, and the more people that acquire income the more people that tend to invest it. Therefore, there is a correlation between capital and employment in real estate or, if you will, between income and labor. An increase in levels of consumption sets forth an increase in prices caused by a corresponding increase in demand, in itself generated by a commensurate increase in the income-employment factor.
It follows, therefore, that real estate growth and appreciation of real capital assets are derived by the equilibrium of capital and investment with labor and employment, which is a characteristic unique to real estate. Which, then, explains the consistent track record of real estate as a wealth-generating venue. And which, moreover, further explains why ‘bubbles' are to be found only in the heads of the ‘bubbleologists' - that is all those who spend countless nights thinking about the next economic Apocalypse - but certainly not in real estate.
With all this in mind, one of the oft-touted clichés of real estate investing is that greed is the driving force that causes investors to jump into the market during times of real capital appreciation and expansion, and that fear is what drives the same investors to jump overboard during times of price deflation and decline. Personally I have never quite subscribed to this line of thought.
To be sure, when we experienced the recent 15 percent per year capital assets appreciation, I invariably stumbled across someone who wished the appreciation was 20 percent. So I guess that can be called ‘greediness'. And conversely, there is no question about the fact that the greatest fear of real estate market participants is to lose money, so there is a huge temptation to abandon the market when there is trouble ahead. But I believe that over time we have all become more sophisticated than this, and that investors have moved beyond the foregoing relatively simple explanation of greed and fear.
Market dips do not cause the panic that once did, not even among all those first-time Buyers or investors who have never experienced a market downturn. In fact, more and more people see periods of price decline as times of opportunity. And conversely, when the feeling is that real estate markets are very close to peak out or that are otherwise dangerously high, investors increasingly display the tendency to temper their expectations and prepare themselves psychologically for the eventual market pullback.
Therefore instead of greed and fear I believe it would be more proper to talk about hope and regret. As our expectations of good rates of return increase as the market increases, so do our hopes that capital appreciation will be even better than anticipated. When real estate begins to lose steam, as it is the case today in many areas, it is regret the feeling we experience when we lose money, even if it is money that we lose only ‘on paper' since we do not intend to sell. Econometric research, in fact, has long established that consumers put the value of a dollar ‘lost' at least twice as high as the value of a dollar ‘gained'. Put differently, any investor would have to earn two dollars to compensate for the psychological drawback of each dollar lost.
To experience regret is not the same as being disappointed. The difference stands in the degree of quantity of the loss perceived by investors. For instance, if a Buyer hoped to make a 15 percent return out of the sale of a real capital asset and only makes 10 percent, he will be disappointed but not regretful. If, on the other hand, the same Buyer will only make 5 percent - or no return at all - he will be regretful.
What separates long-term achievers from the rest of the crowd is the psychological capability to not let market cycles dictate their investment decisions. More particularly, in the ebb and flow of real estate, those who are most successful maintain their strategy throughout market cycles. This is, in ultimate analysis, what distinguishes investors from speculators.
The role of speculators in a free market economy is to absorb risk and add very little liquidity to the market place. In fact, more often than not, speculators will reduce market liquidity by inflating prices - the principal effect of speculation. Investors, on the other hand, play an entirely different role. In theoretical Economics the term ‘investment' refers to the purchase and holding of capital goods, which are not instantaneously consumed - i.e. sold for profit - but, rather, used at a later date. In short-term speculation, the measured risk of the acquisition is considerably higher and, in ultimate analysis, no better option than the leveraged capital appreciation through investment holding.
Real Estate Chronicle
Saturday, October 14, 2006
This HUD's For You
A complete guide to HUD homes for sale.
There is a brand new complete HUD homes Buyer's Guide out there entitled ‘HUD HOMES FOR SALE', which I have been fortunate enough to be called upon to review. It is in the form of an e-book and authored by Frances Flynn Thorsen, a Real Estate Agent of 22 years and HUD specialist.
This is the best guide covering the topic of HUD I have ever read, by far. And it is also the only one I am aware of written with the best interest of consumers in mind. The e-book consists of 112 pages covering each and every aspect of HUD transactions, from qualifications standards to FHA financing and underwriting guidelines. It is jam-packed with helpful hints and tips on how to select an Agent that specializes in HUD homes, all the way to determining how low should one go with the offer, and still get it accepted.
But perhaps most impressive is the writing style that Frances Flynn Thorsen uses throughout the e-book: succinct and to the point, so that anyone can easily and quickly grasp the concepts at hand. This work is written specifically for those Buyers, whether owner-users or investors, who mean business. Her no-frills approach is refreshingly welcome and useful. Moreover, as the procedures for handling HUD homes constantly evolves, Frances goes the extra step to update changes on a website specifically devoted to this book. So, in essence, one buys not only the comprehensive Guide but also all the future updates as well, as and when they come.
HUD HOMES FOR SALE is a user-friendly Guide also for all those non-American investors who are not particularly fond, for good or bad, of the way the United States Department of Housing and Urban Development handles business. Additionally, as Author Thorsen points out very clearly, any qualified Buyer can purchase HUD homes. This is of great interest particularly for Canadian investors, considering the prolonged slide of the American Dollar vis-à-vis the Loonie, which has made the American real estate landscape look already especially attractive for Canadians.
But irrespective of their origins, with HUD HOMES FOR SALE Buyer's Guide in hand all investors can now get into the HUD homes buying process with no fear of lack of knowledge or competence. More particularly, all those overly-cautious purchasers who make it a point to gather every scrap of information about potential investments - and who miss some great opportunities while trying to decide which ones are the great opportunities along the way - need to worry no more. HUD HOMES FOR SALE is the roadmap to success in HUD investing, laid out right in front of their very own eyes.
And last, but not least, a consideration about the price: at USD $19.95 per e-copy, this is a super investment all and by itself. It will save Buyers several hundreds of dollars in lawyers' consultation fees, and the result is going to be definitely more thorough, focused and to the point.
HUD HOMES FOR SALE can be purchased online by visiting http://hudhomesforsale.realtownblogs.com or by e-mailing the Author, Frances Flynn Thorsen, at Fran@TheREALTYgram.com HUD HOMES FOR SALE is a Guide that I recommend openheartedly. It is an e-book that provides the knowledge and tools necessary to develop and implement an intelligent HUD investment programme. I already have my own copy and for anyone interested in successful HUD investments, HUD HOMES FOR SALE is a Guide that will withstand the test of time.
Feel free to tell Frances that I sent you.
Real Estate Chronicle
Wednesday, October 11, 2006
Air Space Strata Plans
The development of air space to offset scarcity of urban lands.
At Common Law a landowner has the right to control the air space above the land he owns subject to statutory restrictions for zoning, aviation and the like. As such, landowners may create one or more air space parcels above their land. Once this is done, the title to each air space parcel may then be dealt with separately from the other titles. Since an air space parcel is treated as land, it may be subdivided into strata lots with common property.
The vertical division of real property is based on the legal conception of land as a volume of space with boundless height and depth. As the density of building in urban areas increases, fewer sites are available for new construction and land values escalate. This trend has produced a growing interest in developing air rights. The concept of land as a three-dimensional entity underlies the land title scheme pretty much everywhere in North America, which allows air space parcels to be created, transferred, mortgaged, leased and subdivided.
Since air space parcels still have a physical relationship to the land because air space rights are part of the land and the ownership of land, the Land Title Act (in British Columbia) as well as other statutes allow landowners to treat their air space as if it were land by depositing a survey of the air space above their land at the Land Title Office. Such survey is called an ‘Air Space Plan'. If the landowner keeps the underlying land but allows someone else to occupy the air space parcel, he becomes what it is commonly known as a ‘remainderman'.
Developers have used the air space parcel concept to construct mixed-use strata projects. This method is typically used where the same structure contains different uses. In effect developers create different air space parcels to contain single-use strata developments. By this means, the same complex may contain one or more separate strata plans, each having a different use. For example, one strata development may be residential while another is commercial. Although they share the same complex, each strata corporation controls a separate portion of the structure.
Virtually every air space development involves construction of a strata building over top of land or buildings owned by the developer as remainderman. It is very important to ensure that there are appropriate arrangements to compel the remainderman to maintain the necessary physical support and related services to the air space parcel, even if the remainderman's property suffers damages. The major concern is that the creation and unregulated sale of such vacant airspace strata lots will, at some future date, through fraud or financial difficulties of a developer, result in the purchasers of such lots being left with vacant airspace strata lots which have little value, as the contracted building will not be built or not completed.
In each air space strata development, furthermore, there should be one or more written agreements between the strata corporation as the occupier of the air space and the remainderman, who is likely the developer. These agreements deal with obligations of support, access, provision of utilities, insurance and other important matters. Finally, the owner of an air space strata lot must be familiar with the relevant agreements between the strata corporation and the remainderman. Since these agreements are usually complex, an owner should obtain legal advice when reviewing such agreements.
Real Estate Chronicle
Wednesday, October 04, 2006
So, If You Are So Smart... How Come You Are Not Rich?
Spotlighting emotion in real estate investing.
Much of the grief all of us experience, at one time or another, as real estate investors is self-inflicted. Especially these days, when markets are cooling off. This is by no means a personality trait exclusive to those operating in real estate, as I know of quite a few people who are equally frustrated with the performance of stock markets as well.
The problem is that we are, well … human. Just human. Being human simply means that we all have feelings, attitudes, desires, beliefs and biases and that, furthermore, we are even too capable of judging and second-guessing. The cleverest of us can even third-guess! Furthermore, we all come to the investment arena from different walks of life, even within the same country, and are accustomed to model our decisions on past experiences, for good or bad.
It can be safely stated, as a matter of fact, that real estate is made more of emotions than logic, more of fiction than reality. How else would anyone otherwise explain the urgent, uncontrollable desire of a Buyer to pay for the interest in a real property several thousand dollars more than what the Seller paid just a few years ago? Emotions certainly play a major role in investing. So important is this role, in fact, that if we want to be successful investors we must understand what motivates us, as well as how the emotions of others move the real estate markets. I am not making this one up: learning emotions and understanding motivation is taught in pretty much all real estate schools, as well as by all those who spend their time couching Realtors.
We know, for example, that while at present real estate markets are on their way down, in the longer run there is a rhythm to them. Over time they move up and down, partially in recognition of the fundamental value that moves each and every capitalistic market – the equilibrium between supply and demand. But partly, also, according to how you, I and all of us feel about the future, that is whether we are optimistic that prices will reach new heights or feel, instead, that they will sink all the way down to the bottom of the ocean. Obviously, when the feeling is good we continue to invest and prices continue to rise. When the love affair ends, the sell-off begins and prices naturally decline, sometimes precipitously. The question of the year then becomes: what causes the sentiment to change?
Well, quite frankly, it is normally not the real value of the investments themselves that changes. This is so, because it is difficult to believe that what was once a good investment suddenly has gone bad, for whatever mystical reason. How sure am I of this? Very simple. If the real estate market drops ten, fifteen or even twenty percent in a very short time, does this means that the property we bought has depreciated that much over the same short lapse of time? That we have been so careless, negligent would be a better word, to use, abuse and misuse our own very dear real capital asset to the extent that rather than ordinary wear and tear, we have inflicted on it extraordinary wear and tear, to the point of shaving thousands of dollars off its resale value? Of course not.
The price of a real estate capital asset fluctuates quite a bit over time, but the core, underlying economic value of the asset itself seldom shifts so dramatically. What really changes is our perception of whether prices are too high or too low, combined with the degree of motivation to buy.
In Economics, the ratio of the perceived value of a capital asset vis-a-vis its intrinsic risk of acquisition is termed ‘worth’. Clearly the lower the risk, the higher the worth. It follows, therefore, that the perceived value – or simply ‘value’ - of a real capital asset is the total monetary worth obtained by reducing exposure to risk and liability. Put in elementary terms, ‘value’ is the total net benefit an investor expects to receive from a purchase, measured in currency. The measure of the ‘value in exchange’ of the real estate transaction is the sales price.
In a free market such as real estate, defined as a market where there are large numbers of rational, profit-maximizers, actively-competing participants, with each trying to predict future market values of individual investments and where important current information is almost freely available to all participants, competition leads to a situation where, at any point in time, actual sales prices will be a good estimate of value. It follows, therefore, that sales prices of transactions past are the best measure of value of transactions to come. And of course, if prior sales prices are on their way down, future sales prices will follow the same pattern.
Naturally, when the general sentiment shifts, the market changes direction. Knowing that this is what is going on in real estate at any given time allows us to construct long-term strategies unique to ourselves, to our goals and objectives, that give us the confidence necessary to ride out the plunges during market deflation, and temper our euphoria in times of market expansion.
The secret to make it in real estate, just as in any other market, is ‘to resist the call of the crowd’. Objective analysis and knowledge, coupled by experience, will get anyone a lot farther than the chatter and hearsay so very common in real estate these days. There are as many opinions out there of what is going to happen as there are so-called experts. Some of those opinions border with nothing short of witchcraft … yes, witchcraft. Like the opinion I have read a few days ago authored by a New York stockbroker (no wonder), who predicts a real estate market crash beginning in 2011, which will last all the way through 2023! I am not a high-flying, hot-shot Wall Street analyst – just an average guy who has spent the last nineteen years selling real estate, and buying it. Throughout all these many years I have witnessed personally that real property values have always gone up in the long-run, notwithstanding the numerous ups and downs the industry has been going through. And that is good enough for me.
John Marks Templeton (1912), the American billionaire, was absolutely correct when he pointed out as the secret of his success that “understanding other people’s emotions is critical to investment success”. And Mark Twain (1835–1910), the American humorist, perhaps put it even better when he said: “Let us be thankful for the fools. Without them, the rest of us could not succeed”.
But nobody surpasses the teachings of Dante Alighieri (1265–1321), the famous Florentine poet, who some seven hundred years ago described in the Divine Comedy his metaphorical tour of duty of the Inferno (Hell), guided by Virgil. At one point the two pass through the place where the lost souls of the sorcerers, liars, false prophets and yes ... politicians are held. The spirits of the damned are immersed into a boiling lake of sewage and excrement, and are poked continually and endlessly by devils armed with tridents. Notwithstanding their eternal punishment, these souls still try to capture Dante’s attention and attempt to thwart him from the path of justice, truth and righteousness. Seeing how shaken, weak and feeble Dante becomes for what the damned tell him, Virgil thunders: “Do not care about them - just look and walk!”
Real Estate Chronicle
Sunday, October 01, 2006
All you ever wanted to know about real estate bubbles.
A gentleman from South Carolina has sent an e-mail last week. He has been reading my Articles on Real Estate Economics, and wants to know how I can possibly take the position that there is no real estate bubble bursting out there. This gentleman believes not only that there is a burst in full progress but that, in fact, it looks more and more like a ‘market crash’ – at least in the area where he is located. He corroborates the e-mail with an impressive set of figures taken from local sources.
While I am grateful to this individual for taking the time to send his otherwise lengthy message privately, I thought I’d present my response also to the public at large, in hopes to shed some light on this subject matter. Following, therefore, is a FAQ on bubbles formulated in accordance with the points and concerns raised in the e-mail. I have, furthermore, notified this person that this Article represents my response and have invited him to come and read it in this forum.
So here we go.
Q. What is a real estate bubble?
An economic bubble is a particular market condition, wherein prices of commodities or assets increase to levels so high as to no longer reflect the utility of usage of the commodities or assets being exchanged. The main cause of an economic bubble is speculation. Speculation is one of the many forces that act on capital at any given time. In theoretical Economics, speculation is defined as ‘the acquisition of financial or capital assets made solely to quickly profit from fluctuations in their prices, or of goods or commodities with no real intent to consume or otherwise use them for production’.
Contrast this with investment, which is defined as ‘the acquisition and use of financial or capital assets with a view to generate income, or of goods and commodities for the purposes of consumption or production’.
Clearly, pursuant to the foregoing definitions, the real domains of speculators are the stocks, bonds, treasuries, futures and debentures markets, cumulatively referred to as the Stock Exchange. Many ‘investors’ in the Stock Exchange actually speculate, since they bet on a quick gain dependent upon the volatility shifts of the market they operate into, and since they do not intend to consume the products they buy. A purchaser of one-hundred shares of IBM does not intend to actually go work for IBM, nor does he necessarily intend to start consuming outputs produced by IBM. He merely intends to buy IBM shares at a lower price and resell them with a mark-up.
Speculators do operate in the real estate markets, but to a far lesser extent, mainly because real estate typically moves in slow, very slow motion – even when real estate markets are ’fast’. The fluctuations in prices that occur in the Stock Exchange in a few hours typically take days, or even weeks, to happen in real estate. Additionally, fluctuations expressed as a percentage change of their nominal market value are far greater and substantial in the Stock Exchange than in real estate. For instance, it is not unusual for stocks to gain or lose 30-, 40- or 50-percent of their value in the round of a week, sometimes even in a single day, but no such dramatic variations exist in real estate. One never hears of a rancher abutting a golf course that on Monday morning is offered for sale for $500,000, and which by Friday afternoon has been reduced down to $250,000. Because of this, speculators tend to shy away from real estate markets.
The few speculators that do operate in real estate are those who engage in the ’flipping’ of real property assets. Many investors think of themselves as masters of flipping, but truth of the matter is that they do not flip at all. They resell for profit. True flipping, in real estate, consists in the purchase and selling of an interest in land without paying for it with one’s own money. Thus, a speculator flips real estate buy putting in an offer to purchase an asset, and then ‘flips’ the same asset (which the speculator does not own as of yet) to a second purchaser for a higher price, who will complete the transaction on the same day as the speculator’s original transaction. The speculator will then take the money from the second purchaser, retain his profit margin, and transfer the balance to the Seller. The speculator, in other words, will pay the Seller with the money of the second purchaser, not with his own money. This is a practice known in the United States and some Canadian Provinces as ‘double escrow’.
Needless to say, all those who purchase fixer-ups, refurbish, remodel and then resell them, and think of themselves as great speculators, are not speculators at all. They are also no masters of flipping. They are just merely ordinary investors, with a super ego.
Here is the classic comparative economic breakdown, by category, of market participants operating in both the Stock Exchange and Real Estate:
Stock Exchange ... Real Estate
65% ................ 5%
Investors (short term)
25% ................ 35%
Investors (long term)
10% ................ 60%
I have seen some sources last year pegging the percentage of real estate speculators to double the one of the forgoing table, and am further aware of some economists and market analysts who cite a 15 percent figure. But even if, by hypothesis, speculators represented a 20 percent of real estate market participants, 4/5 of all participants would still be made up of regular short and long-term investors. Therefore, as the primary cause of economic bubbles (speculation) is almost entirely absent from real estate, or has otherwise minimal or reduced impact, it is ludicrous to speak of ‘real estate bubbles’.
Thus my position.
Q. Still, prices are tumbling down. If it’s not a bubble, what is it?
Price deflation. Plain, ordinary, old-fashioned, lemon-flavoured price deflation.
Deflation is a decrease in the general pricing levels of assets or goods, which occurs when the equilibrium between supply and demand is altered, resulting in a higher or lower purchasing power of money within the market (in the present case, the purchasing power is higher since prices are coming down).
There are two, and only two variables capable of altering the equilibrium of supply and demand: 1) a tightening or expansion of the money stock which, in turn, alters the cost of borrowing, i.e. a shift in interest rates, or 2) an increase in inventory supplies. Alfred Marshall (1842 – 1924) was the first to attempt to explain price behaviour within the context of the equilibrium between supply and demand in competitive markets. Marshall discovered that consumers attempt to equate prices to their marginal utility, defined as the measure of happiness or satisfaction gained by consuming goods and services. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain consumer behaviour in function of shifts in pricing.
The propensity to invest in real estate is partly dictated by the expectations of future profitability and by the present perception of market risk. The table above shows that a good 40 percent of real estate market participants is composed of speculators and short-term investors. These folks are in the market solely to increase their level of wealth, in the short and very short run. When the perception of market risk on the part of 40 percent of market participants increases sharply - which is exactly what has been happening these past few months - capital will exit more and more from the sphere of real estate and will find its way elsewhere (typically the stock market). There occurs, in other words, a shift in volatility risk.
The turnover in real estate markets drops when the pool of buyers ready, willing and able to consume real estate products abates. This, in turn, discourages consumer spending on real estate products, demand lowers and markets cool off.
Q. Bubble, deflation ... call it any which way you want, the result is all the same for me.
But not for me.
The difference consists in the repercussions and effects that bubble bursts and deflation have on market wealth, defined as the combination of materials, labour, land, services and technology in such a way as to capture a profit (Adam Smith). The aftershocks of a bubble that bursts are usually terminal and irreversible: market wealth disappears, it vanishes entirely. And it takes forever to re-build it, right from scratch. The greatest example in recent times is the infamous Black Monday – October 19, 1987 – when the Dow Jones collapsed 22.6 percent in value in a single day! It took nine years for Wall Street to lure investors back.
The burst was so powerful that even today, nineteen years after the fact, there are people out there still hurting. Lives were changed forever, companies were wiped out, families were ripped and broken apart and a few people committed suicide. And not only in the United States, but all over the world. Markets fell 41.8 percent in Australia, 22.5 percent in Canada, 45.8 percent in Hong Kong, and the 26.4 percent in the United Kingdom.
Now, that’s a bubble burst!
With deflation, on the other hand, wealth can be recovered. It is still there, though it cannot be tapped.
Finally, a few words about the soundness of real estate as a wealth-generating vehicle, even during times of deflation. Homes have appreciated consistently to the tune of 7.5 percent per year over the past thirty years, notwithstanding the numerous ups and downs the industry has been going through. Unfortunately, 40 percent of Americans and 35 percent of Canadians are renters and that is too bad, since the fastest way to riches is buying real estate, as opposed to buying just about anything else, including stocks and bonds. The average Canadian renter has a net worth (assets minus liabilities) of CAD $6,000. The average Canadian homeowner has a net worth of CAD $225,000 (source: Canadian Real Estate Association). Figures in the States are comparatively similar.
One of the best wealth-generating source is mortgages. Even the so-deprecated ARMs are good, since they are used to buy homes and build up value. We do everything with our homes in addition, of course, to live and sleep inside them: we use them as collateral for personal lines of credit, we use them to increase our net worth, we use them to establish our hierarchy within society, we use them to improve our own self-esteem and, last but not least, we also use them as the parachute of last resort to save us from dire financial straits. Ownership of our homes is everything to us.
My concluding remark is that a slow-down in real estate has actually a positive influence on the economy by allowing salaries and wages to catch up and thus to regenerate the pool of buyers, especially first-time Buyers, entitled to take their first steps into the world of real estate. The ratio between wages and real estate market values is too skewed to values. Whereas market values in metropolitan areas have appreciated an average of fifteen percent per year for the past five years - or a total of seventy-five percent, salaries have increased an average four percent per annum – or twenty percent total. There is, therefore, a fifty-five percent gap, which accounts for the problem buyers are facing today when it comes to go to the bank and qualifying for a loan.
Thank you for the e-mail.
Real Estate Chronicle