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
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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
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Craig’s List Rental Scams
January 25, 2009
I love Craig’s List. I love it for many reasons – I won’t count all the ways I love it, suffice it to say that it’s a great public service as well as a prime way to drive traffic to one’s real-estate related web site. 
However, Craig’s List is seen by some predators as a way to defraud, scam, and bamboozle. There’s a rental scam going around on Craig’s List, where someone tries to rent out a house they do not own, one which they saw for sale on Craig’s List. They use the picture from the ad on Craig’s List, and fashion a new, fraudulent ad of their own.
I have a sweet property listed for sale on Monterey Avenue in Soquel, and a couple of people contacted me yesterday about this scam – they had been given the property address by the scammer, and they went and drove by the property, whereupon they saw my “for sale” sign and contacted me, asking if it was for rent or not.
One of these people was kind enough to forward the e-mail correspondence she’d had with the scammer. The scammer had provided her with “proof” that he was indeed the lawful owner of the property. Here’s the proof:
and
Those are pretty nifty Photoshop jobs, but they are not anything that would prove ownership of a piece of property. Ownership is is established by the use of deeds in California, not Certificates of Ownership.
Please don’t fall victim to any such scams! The scammer asks the victims to proceed to a Western Union and send in the deposit money, and upon receipt of which he will make arrangements for you to get the keys. Except that since he’s not the real owner, you won’t get any keys, you’ll just end up a lot lighter in the wallet.
Posted by SantaCruzBroker at 9:26am
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Is 2009 The Year to Buy Santa Cruz Real Estate?
January 17, 2009
This is a question that I get asked, and find myself asking, quite a bit these past couple of weeks. I am working with a number of buyers who are skittish and waiting for prices to hit just the right point. After all, what’s the sense in buying a depreciating asset? Who wants to buy something that they know is going to lose them money – maybe a lot of money – within a few months after buying it?
One of my clients sent me a link to a great web site – Housing Crash Continues, Bubble Pops. It lists 14 great reasons why this is a terrible time to buy real estate. It’s pretty strong stuff, with lots of inflammatory statements like, “Realtors just lie outright about…”. Well, I always say, never attribute to malice what can be explained by stupidity. I don’t think that Realtors are habitual liars, but it’s true that many of us are not as perhaps informed as we might be.
I won’t address all 14 points that the The Housing Crash guy brings up, but I would like to make a few comments. The Housing Crash guy says:
A landlords’ rule of thumb is that a house price should be a maximum of 15 times the annual rent for that place, yet in coastal areas, houses are still selling for 30 times annual rent
I think he’s got a good point there – which goes to underscore my belief that prices in Watsonville are actually very reasonable at the moment. Looking at Craig’s List rentals for Watsonville, I see you can rent a 3-bedroom condo in Apple HIll for $1,875 a month. Those condos are now selling for around $190,000. So at $1,875 a month, that’s $22,500 a year, or $337,500 over 15 years. Hmm…so does that mean according to the Crash Guy, we should all be moving to Watsonville?
Put another way, how much does it cost to own that same condo which rents for $1,875 a month? Let’s say you put down the minimum 3.5% as required for an FHA loan, and that you are paying 5.75% interest per month, which includes the allowance for the FHA insurance. You’d need a down payment, then, of just $6,650, and you’d have a loan of $183,350. Your fully-ammortized 30-year loan payment would be about $1,070 per month. Then you’d have property tax of about $175/month, and then of course your HOA fee for that unit of about $290/month. That comes to $1,535 per month. Hmm. It costs less to buy in Watsonville than to rent.
I know, I know – you don’t want to live in Watsonville. You’d rather pay a premium and live near the beach, or closer to your job in Silicon Valley, or closer to your friends who all live near downtown, or maybe you don’t want to live in Watsonville because you’re spooked by los pandilleros, or you want your kids in a better-performing school district. Whatever your reason, I can accept that you might be interested in buying somewhere other than Watsonville (even though I think real estate there is a an exceptionally good value at the moment).
We all know that prices in Santa Cruz are a lot higher than in Watsonville, but let’s see some examples. Let’s start by looking at Craig’s List rentals in Santa Cruz. Wow, they’re a lot higher than in Watsonville! Thank Goodness for UC Santa Cruz, drivin’ that rental market right through the roof, eh landlords? Looking over the ads on Craig’s List, it’s safe to say that a 3 bedroom, 2 bathroom house would rent for about $2,400 a month in Santa Cruz, assuming it was in a not-so-great location. That’s a pretty conservative assessment, having looked at what’s available.
At $2,400 a month, that’s $28,800 a year – times 15, that’s $432,000, which is the maximum that The Crash Guy says you should pay for a house if it rents for $2,400 a month. Are there any 3/2 houses in Santa Cruz for $432,000? No, of course not! Don’t be silly. But there are presently six 3-bedroom, 2-bathroom houses in the city of Santa Cruz under $500,000.
Does that mean that housing prices are still too high in Santa Cruz? According to the Crash Guy – yes. According to me – yes. I do think that prices in Santa Cruz (and Capitola, and Soquel, and Aptos, etc.) are higher than they will be towards the end of the year. Does that mean you shouldn’t buy a house in Santa Cruz in 2009?
Good question. Let’s look at the payment for a $500,000 house – but let’s assume you’re putting down a reasonable 10% instead of the FHA minimum of 3.5% – so you’d have a $450,000 loan, again at about 5.75% because with only 10% down, you’d still need to pay mortgage insurance. A 30 year fixed loan at 5.75% would run you $2,626 a month – plus $458/month in property tax, plus about $75/month for insurance, leaving you with a monthly payment of about $3,159.
However, you mustn’t forget about your mortgage interest tax deduction – of that $2,626 per month, about $2,100 is interest (gulp) – plus the $458 in property tax (which is also deductible), means you have a monthly tax deduction of $2,558. Let’s say you’re in a tax bracket of 25%, and you can figure you’d save about $640/month in federal and state taxes, bringing your effective monthly after-tax payment to about $2,519 per month, or just about $120 more than renting.
Is $120/month too high a price to pay for the benefits of ownership vs. renting? You tell me.
Here’s what I will tell you: it seems clear to me that there are many properties in Santa Cruz county which now make economic sense to buy, and that number is increasing, and will continue to increase throughout the year. There is no shortage of blogs to read (try here, and here, for example) suggesting prices will continue dropping beyond 2009. I admit – quite possibly, this is true.
However, I would argue that if you want to live in Santa Cruz, and you have the option of either renting or buying, that for many people, the numbers will soon pencil out to where buying may, in fact, be the right choice for you in 2009. There. I’ve said it. But I won’t be offended if you want to take that with some salt on the side.
Posted by SantaCruzBroker at 11:47am
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Blue Light Special Turns Red!
October 17, 2008
A month ago, I wrote a blog entry about a homeowner in Soquel who was having a blue light special on the sale of his home.
I guess it didn’t work out so well – his Soquel home is now back on the market – for $829,000, or about $79,000 more than it was on for sale about a month ago. Zoinks – swap that blue light for a red one – hold on, kids!
In a market like this, I can tell you one thing – increasing your asking price when your property hasn’t sold is not a winning strategy. The blue light special, that was a clever marketing gimmick, but it didn’t sell the house.
It should have been a good lesson, though – even at $749,997 the home is, apparently, over-priced in today’s market. The median price is now down to $475,000 in Santa Cruz county. Of course, this home is in Soquel, which is considerably more expensive, but the median there is only $610,000 (although the average is $843,000).
This time around, rather than trying to catch the buyer’s eye with a lowered price, the seller is trying to catch the Realtor’s eye – with a juicy 4% commission to the buyer’s real estate agent. That’s a healthy $33,160 the buyer’s agent would get to share with his broker and the tax man. A strong incentive, to be sure – but of course, we Realtors are duty bound to hold our clients’ interests above our own, and persuading your client to over-pay on a real estate purchase in exchange for a healthy commission seems like a breach of fiduciary responsibility to me.
Not that a licensed Real Estate agent would ever put his own financial interests over the best interests of his client. Of course not. That 4% commission just helps to bring about a few extra showings, by Realtors who think, hmm, maybe my client won’t really like this place, but since it’s paying a bigger commission, maybe it’s worth a shot.
If we extend that logic a bit further, it means that all these sellers who are offering just 2.5% or 3% to the buyer’s agent are missing out, leaving tens of thousands, maybe hundreds of thousands, of dollars on the table – they should really be offering 5%, or 8% – or more! – to the buyer’s agent; after all, that’s a lot cheaper than lowering the asking price of the home by 12%, which is what the market is telling them they need to do.
Why has nobody thought of this yet?
Have a good weekend everyone!
Posted by SantaCruzBroker at 4:03pm
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