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Monthly Reports 'Recreational' at Best

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | August 15th, 2014

It has been said that figures lie and liars figure. But even when the numbers are truthful, they often are nearly meaningless.

Take average home prices. They are widely reported by regional and local media, even though they are generally national in nature. While it's nice to know that housing values throughout the country are up or down -- or holding steady -- the figures often have little meaning when it comes to what's happening on your block or in your neighborhood.

David Rathgeber, a northern Virginia real estate broker, says home price data is "recreational" rather than actionable. He also rightly points out that the figures quoted are usually old news, as much as four months after the fact, even though they are often mistakenly reported as this month's or last month's numbers.

Why such a delay? A two-month delay is "unavoidable," he says, "due to data collection limitation -- the lag between contract and closing -- and another month or two for data assembly, review, comment and publication."

Rathgeber also points out that "taking action" based on two- to four-months-old information "can be a disaster."

Prices rise or fall in two ways -- appreciation or depreciation -- and according to the mix of sold houses.

If the trend has resulted from rising prices, sellers might want to hold firm on their asking price, even if the house is currently overpriced. It may be getting only a few showings, or perhaps none at all. But if prices are, indeed, rising, the seller can hold on until values catch up.

And if prices are falling, sellers will have to cut their inflated asking price by a rate greater than that of the overall market decline if they want to lure a buyer.

Buyers, on the other hand, may be willing to pay something above the asking price when home values are rising because they have a reasonable expectation that, in a few months, they will recoup their "loss." If prices are falling, buyers will have no sense of urgency because they expect greater value for their money in the future.

But beware: The average home price can change even when individual values do not.

That's because of the distribution of the properties covered in the price report. If more lower-cost houses than usual are sold in one particular month, the average price will skew lower. Similarly, if more than the usual number of expensive places change hands, the average will swerve higher.

And one more thing: The true average rarely changes more than 1 percent from one month to the next. So view reports that show values rising or falling by more than that with a high dose of skepticism. In Rathgeber's words, they are "patently meaningless."

Again, what's happening on a national scale usually has little significance to values in your neck of the woods. But even more important to note is that even though averages can be built for any zip code and any month, the sample size is generally not large enough over a short enough time to have any significance.

Generally, to calculate a meaningful average price for a particular area would require years of data, much of which would be so old that it would no longer be relevant. The actionable information today's buyers and sellers need must be fresh: what went down last week and last month, not years ago.

While we are debunking myths about prices, let's take a deeper dive into two popular reports covering mortgage rates: one from Freddie Mac, the other from HSH Associates.

Freddie Mac, the huge secondary mortgage market company, publishes a widely quoted monthly report on the average rates for 30-year and 15-year loans. Its survey is an average of the offerings to "prime" borrowers from 125 primary lenders nationwide, large and small, for purchase loans with 20 percent down.

Even that much information is often more than gets picked up by news organizations. But how many people these days make that large a downpayment? And who is a prime borrower? Freddie Mac doesn't have a definition, but reports that it is "not necessarily" someone who has never missed a payment and is always on time.

HSH, the New Jersey mortgage information firm, says its weekly average results from a survey of 600 "active" lenders who are in the market and able to make loans directly to consumers. Here, the survey asks lenders about their pricing for 80 percent loan-to-value mortgages to someone with a 740 FICO score or better.

This is the "stuff of normal humans," according to the company's Keith Gumbinger. But again, do you fit that bill? If not, you can expect to pay more than what's reported in the media. At the same time, because Freddie Mac's and HSH's numbers are averages, you might be able to find lower rates.

This is not to damn either Freddie's or HSH's surveys -- or any of the pricing surveys, for that matter. Rather, the point is this: Take all that's reported with the proverbial grain of salt. Do your own sleuthing and you just might do better.

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Protect Your House From Wildfire

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | August 8th, 2014

Wildfires like the one last summer that killed 19 elite firefighters in a blaze near Yarnell, Ariz., can't be stopped. But there's plenty homeowners can do to protect their properties.

If you don't think you should take remedial action, think again. One-third of all houses are located in what fire safety officials call wildland urban districts, which are near or among areas prone to wildfires.

Worse, perhaps, wildfires have ravaged houses in three-fourths of the 50 states. And with more and more people choosing to live in rural areas closer to nature, the chances are greater than ever that someone you know -- maybe even you -- will lose a house to a fire.

Indeed, on most days, a wildfire is burning somewhere in America. Over 33,000 fires have burned 1.6 million acres already this year, according to the latest count by the National Interagency Fire Center in Boise, Idaho. And the state with the most fires isn't California, Arizona or another place in the West. It's Georgia.

Fortunately, wildfires are covered by standard homeowner's insurance policies. But the best insurance is prevention. Here, gathered from a number of sources, are some steps you can take to protect your house, improve its fire resistance and shield it from indirect exposure:

-- Choose a firewise location. Canyons may offer a beautiful view, but they tend to act as chimneys, drawing the fire and accelerating the speed at which it spreads. A level site is better than a sloped one. A grass fire moves up a slope four times faster with flames twice as high as fire on level ground, because hot gases rising in front of the fire preheat the up-slope vegetation.

If you're building new, you can avoid this kind of topography. Also, find out about prevailing winds, seasonal weather conditions and the local fire history, so you can plan your landscape design accordingly.

-- Implement landscape safety zones. Work on your surroundings so the landscape will not bring a fire to your door. Do this by creating three safety zones, the combined extent of which will depend on your property lines and your risk level. In high-risk areas, even a zone reaching 200 feet from the house may not be enough.

The first zone should be a well-irrigated area that circles the structure for at least 30 feet on all sides. If your house is on a slope, though, a clearance of between 50 and 100 feet may be necessary, especially on the downhill side of the lot.

Plantings in this area should be limited to carefully spaced indigenous species. Beware of "ladder fuels," or vegetation that serves as a link between the grass and treetops and enables the fire to climb into trees or onto your house.

Trees and shrubs are fine in the first zone, as long as dead or low-hanging branches are removed and the height of ground vegetation is controlled. But the more grass, the better, because a wide lawn can serve as a fuel break just as much as a driveway. Ditto plants with a high moisture content.

Your irrigation system should also reach the second zone, which can contain a limited number of low-growing plants and trees spaced at least 10 feet apart. Dead or dying limbs should be trimmed away, and no live limbs should come within 10 feet of the structure. On trees taller than 18 feet, prune away branches that are less than six feet from the ground.

In zone three, thin selected trees and remove highly flammable vegetation such as dead or dying shrubs and trees.

-- Consider your roof, walls and windows. The landscape zones you construct around your house should keep all but the most ferocious wildfires at bay. But if one does happen to break through this protective zone -- usually from wind-blown embers or firebrands, sometimes more than a mile away -- ignition is most likely to occur on the roof.

Fire officials say eye-catching, untreated wood-shake roofs are the No. 1 cause of home losses in wildland areas because they can catch wind-blown sparks. If local rules allow, a better choice is factory-treated shakes. But consider using such noncombustible or fire-resistant roofing materials as Class A shingles, metal, cement and concrete products, or tile made from slate or terra cotta.

Fire-resistant subroofing also can improve survivability. But don't be fooled into thinking an expensive roof sprinkling system will stop a fire. You need a large volume of water to make a roof safe, yet water pressure is generally at its lowest during a fire. Also, the electricity needed to run the system is likely to fail, and the high winds that usually accompany a wildfire often divert the spray away from the roof.

Walls, too, should be made of fire-resistant materials such as stucco or masonry. Vinyl can soften and melt during a fire, offering little or no protection.

If you're building a new house, minimize the number and size of windows on the downhill side, the side most likely to be exposed to a fire. Smaller windows perform better than larger panes, according to the National Association of Homebuilders Research Center, and double-pane or tempered glass are more effective than single-pane glass. For greater protection, windows, sliding glass doors and skylights should have nonflammable screening shutters.

To prevent sparks from entering your house, screen your chimney with noncombustible wire mesh. Also cover exterior attic and under-floor vents with wire mesh -- plastic or nylon screening will melt -- no larger than an eighth of an inch. Screen under your porch, too, as well as any other areas below the ground line.

Also, locate your under-eave roof vents near the roofline rather than near the wall to prevent heat or flames from becoming trapped inside. For the same reason, the eaves themselves should be boxed or designed with minimal overhang.

Finally, inspect your house occasionally, looking for breaks and spaces between roof tiles, warping wood or cracks and crevices in the structure where fire or sparks could enter.

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How to Spot a Bad Deal

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | August 1st, 2014

Crowdfunding has found real estate. More than a handful of outfits have sprung up to collect small amounts of capital from a large number of individuals to finance their deals. One New York company is even selling stock in a single building in the nation's capital.

Until the JOBS Act of 2012, real estate investing was mainly the province of high-net-worth individuals: so-called "accredited investors" who earn more than $200,000 a year and were protected somewhat by the Securities and Exchange Commission.

Large-scale investors can, and sometimes do, put their money into losing propositions. But at least the SEC requires full disclosure, so investors won't be tripped up by hidden, undisclosed details.

But with little or no SEC oversight for crowdfunding investments, how do small, mom-and-pop investors with only a few hundred or thousand dollars to risk determine which deals are shrewd and which are lewd -- that is, which are destined to be a financial success and which are failures from the get-go?

"The key to successfully investing in real estate is performing a thorough due-diligence analysis," says David Manshoory, founder of AssetAvenue. The company is just one of several crowdfunding real estate platforms that seek to connect investors with real estate professionals offering access to high-yield deals.

Seasoned investors know the importance of investigating all aspects of a transaction. But Manshoory says novices often "get excited about acquiring part of an investment property and lose sight of the mechanics of knowing what they are buying."

Here, from AssetAvenue, are some tips for rookies to spot a lousy real estate deal:

-- Market conditions. Two major factors are the keys to underwriting an investment in income-producing property: the market and the property. But of the two, local market conditions trump everything else.

Put simply, a great property in a declining market is generally a bad investment because no matter how you try, you can't change the market. But a poor property in a good market can be improved, becoming a good property in a good market.

"Analyzing the demographic trends of population growth, income and employment in the local market will tell you whether opportunity or risk lies ahead," Manshoory says. "It will also show which property types are in demand or oversupplied."

-- Misleading financials. The bottom line can be manipulated into whatever will make the deal work. So investor beware. Many sellers will overestimate revenue and/or underestimate expenses, making the property appear more profitable than it really is.

According to the AssetAvenue founder, it is critical to get the real operating numbers, not a projection of potential rent and estimated expenses. "Confirm and verify every element of income and expense," he says, "and make sure your offer is based on the actual financial performance of the property."

-- Poor-quality tenants. Leases are the most important documents attached to an income property. They produce the income, so it is critical to review every lease and understand the financial strength of the tenant behind each lease.

In an apartment building, tenant files with poor or nonexistent credit reports and lack of references are a red flag. If the building is filled with tenants who have a history of making late payments or being evicted, your vacancy, management and legal expenses will be higher than anticipated.

The same screening mechanism takes place with tenants in shopping centers or office buildings, where examining rent rolls, payment histories and credit files of existing tenants can be enlightening.

-- Hidden property conditions. The seller always knows more about the property than the buyer. So to make an intelligent investment decision, the buyer's job is to dig for the information the seller may not want to volunteer, or perhaps isn't aware of.

Part of your due-diligence checklist involves inspecting the property's condition, including physical items such as building systems, environmental matters and structural components. Hire the right professionals to give you estimates on the maintenance costs of these items, their lifespans, and how much it will cost to replace them when needed.

The condition of the property will determine how efficiently you will be able to manage it, Manshoory says.

-- Legal challenges. Intangible items, such as title, survey, zoning and land-use regulations, are important, too.

Sellers sometimes market their property indicating that it can be zoned for another use and has the development potential to add additional square footage. As a buyer, the burden is on you to make sure what the seller is saying is true. Do not assume that the proposed use of the site will be permitted as advertised.

-- Investing online. When it comes to facilitating your investment activities online, be sure to choose a credible platform that only does real estate deals, is backed by a team with years of deep experience in real estate investing, and has people available to answer your questions.

The team should strongly vet their deals, set realistic expectations and have a consistent track record of delivering solid returns.

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