Speculating on Santa Cruz Real Estate
April 02, 2009
I got a phone call the other day from a lady who was interested in one of my listings in Capitola. Unfortunately, the property had just closed escrow the previous day, and I let her know…being the good Realtor I am, I quickly brought up the MLS and tried to find some good “switch” properties for her.
I found one, and during our conversation, it turned out she was an investor, looking to buy a property for investment purposes. This came up because the “switch” I had found for her had higher HOA dues than the property she was originally calling on, but I explained that the “switch” would rent for considerably more than the property which originally interested her, and would in fact provide much better cash flow.
These days, though, the people who are investing for cash flow are not buying in the mid-county area (Capitola, Aptos, Soquel, etc.) – because the properties there do not cash flow without a huge down payment- and even then, if you were to put a huge cash down payment, you would have a poor cash-on-cash return of your investment. I suggested to her that she take a look in Watsonville, because there’s a place where you can get good ROI (return on investment) with a relatively low down payment.
She wasn’t interested in buying in Watsonville, though. Her feeling was that Watsonville would not be appreciating in the future, and that she felt that Capitola, Aptos, and Soquel would have much better appreciation in the future.
Ahhh. Here is an important distinction to make: this lady is not truly an investor. Real investors are in fact snapping up properties in Watsonville in droves. This lady is a speculator – she speculates that the values in Capitola and such will be going up farther and faster than they will in Watsonville.
We then spoke for a few minutes about future price appreciation. I indicated that it will be some time before prices start rising in the mid-county area, and that before they do, prices will continue dropping for some time to come – whereas Watsonville has fallen farther, faster, and is closer to the bottom. However, to an investor, it does not matter so much that the prices in Watsonville will continue to fall for some time to come. When a property is truly providing positive cash flow, it does not matter much that the value has dropped, if it costs you nothing to own it and instead reliably kicks off money every month that ends up in your pocket.
I don’t see the sense in buying something in, say, Santa Cruz that requires a large down payment, which does not provide much in the way of cash flow (and probably has a negative real cash flow, considering vacancy factor, maintenance, etc.), and will be heading steadily down in resale value for some months (or years?) to come, before someday eventually climbing back up to the price you paid for it, and then jumping high enough up over that price to justify the money you have spent on taxes, insurance, maintenance, and of course, the cost of the eventual sale (let’s not forget that 6% commission!).
On the other hand, it is patently sensible to me to buy a $250,000 3-bedroom house in Watsonville, put down 20% ($50,000), rent it out for $2000 a month, make $500/month after principal, interest, tax, and insurance – and assuming a 10% vacancy factor, you’re making a 10.8% return on your money every month. Now that is what I call investing! Who cares if the property drops in value the next 1-2-3 years? You’re making a 10.8% return on your $50K, where else are you going to get that? OK, I didn’t factor in maintenance and whatnot, but even so, you’d still be looking at a return that’s much better than you’re going to get in today’s stock market.
Having said that, there are investors who do work in the mid-county area and do well – however, these are people who invest in properties that are, typically, not in a condition that can be financed. They pay cash for the properties, do the repairs necessary to put them into a livable, easily-financed condition, and turn around and flip them in a short period of time. Typically, they are contractors, or investors paired with contractors. There are very few investment-grade properties in Santa Cruz county outside of Watsonville where you can buy, hold at a profit, and sell down the road for a net profit – without speculating on an eventual price increase to make it all worth the considerable risk.
Posted by SantaCruzBroker at 12:01pm
No Comments »
It’s Nigh Time to Buy in Santa Cruz
March 14, 2009
A few days ago, after about a month’s silence, I wrote something of a “doom and gloom” blog entry about Santa Cruz real estate – in fact, I’m proud to say, the entry was even picked up on the HousingDoom.com blog, which I read now and again to stay in touch with my darker side. You see, I felt the need to vent about what I see as a lot of hype by various individuals and organizations saying what a great time it is to buy some real estate.
As I’ve said before, it may in fact be a good time for you to buy some real estate here in Santa Cruz. In any market, it really depends on your situation. All I’m saying is, don’t buy into the hype – positive or negative – about the current real estate market. Do your own research, make up your own mind. Make an informed decision, and be prepared to live with the consequences.
It may be that you decide that it makes sense for you to buy some real estate right now in Santa Cruz. Over a hundred people bought property in the county in February – and did all of these 100 people make a horrible mistake? Indubitably, some of them did. Just as indubitably, some of them made very shrewd investment decisions which will yield rich rewards down the road. After all, let’s not forget the golden rule of real estate: you make money when you buy, you reap the cash when you sell.
If you were to ask any my buyer clients about what I’ve been telling them in person as we’re out looking a property, I bet they’ll all tell you I said this: “Be patient, time is on your side.” I have some clients with whom we’ve been looking, on and off, for many months. With each passing month, the properties that are in their price ranges just keep getting better, and better still. The problem right now isn’t so much the price of the homes – it’s the idea that a better home for the same price is waiting just around the corner.
The truth is, while the median price in Santa Cruz county is now down to a “wow I can afford that” $429,000 – there are not many of these homes for sale in the central parts of the county (e.g. Santa Cruz, Soquel, Capitola, Aptos); the sales are for the most part happening in areas where the sellers are more motivated – and that means, the areas with a high percentage of foreclosures, or distressed homeowners who need to (try to) sell quickly to avoid foreclosure.
However, the sharp rise in unemployment, rising foreclosure rates among Alt-A and Prime borrowers, coupled with pent-up seller demand (sellers who really want to sell, but have been waiting for the market to go back up) means that every day, prices of real estate even in prime locations continues to drop down to where it is within reach of the average Jane who has a good credit score, low debt, and a good enough, fully-documentable income. Jane, your time is coming.
I ended my previous blog entry saying:
It’s quite a bit more challenging to buy real estate today that you won’t regret having paid so much for a year from now.
Buyer’s remorse is, of course, a terrible thing. I think you can have buyer’s remorse in a market even that is appreciating strongly, because remorse can come from a variety of factors. Feeling that you have overpaid, or regretting that you didn’t wait to buy as you watch prices in the neighborhood into which you have bought keep tumbling lower can be, to be sure, nauseating.
For that reason, I caution my buyers: be patient. Wait, until you find the house that you love, at a price you can comfortably afford. This is not the market, or the economic cycle, in which you want to be stretching. If the house you want to buy is a stretch – don’t buy it now, this isn’t the time. If you wait just a bit, a very similar house will come on the market in another six months which won’t be such a stretch.
Even then, “six months from now,” I wouldn’t be surprised if prices keep right on dropping. Might you still be a happy homeowner, even so, having not bought at the rock bottom of the cycle? If you are patient, and you buy the right house, in the right location, that fits your lifestyle, your plans, and your budget comfortably, then I expect that you’ll continue being happy in your new home, even should it drop in value over the next year or two. And, down the road, you may be pleasantly surprised to find that the house you bought because you loved it and it was affordable at the time turned out to have been a great investment. Imagine that.
Posted by Administrator at 2:47pm
No Comments »
Local Girl Does Good
February 13, 2008
I was chatting with a friend of mine on-line today, and he said, “Oh, I saw your neighbor on the front page of the Santa Cruz Sentinel yesterday.” “Neighbor?” I asked, “What neighbor?” “Nice neighbor” he said, and then signed off to go run some errands. So, I headed over to the Santa Cruz Sentinel, and here’s what I found:
[From Santa Cruz Sentinel - Aptos native Marisa Miller makes Sports Illustrated cover ]
You can’t miss Marisa Miller in this year’s Sports Illustrated swimsuit edition. Just check out the cover. This marks the seventh year the Santa Cruz native made the magazine’s big-selling swimsuit edition, but the first time she has landed the high-profile spot on the magazine’s cover.
My question, as always is, what’s this going to mean for Santa Cruz property prices?
Other folks will have different questions, like “Is this really ‘Local Girl Does Good’, or ‘Local Girl Sells Herself Out and Endorses the Objectification of Women’?”.
It turns out that the other Santa Cruz native to be a Sports Illustrated swimsuit model, Ann Stinton in 1974, has formed a group called Media Watch, which challenges sexist imagery in the media. Ms. Stinton alleges that Sports Illustrated “continues to produce images that make sex a product and de-emphasizes personal relationships.”
What would they say about this in St. Tropez, France? And what’s the median home price there, I wonder?
Posted by SantaCruzBroker at 12:42pm
No Comments »
Blog Entries
