All Forum Posts by: John Fulton

I think some people's feathers were ruffled but I suspect they didn't read my thread in its entirety because I said I believe ownership is a better alternative to renting in terms of reducing the wasteful spend, but that doesn't make your primary home a profitable investment.  The point of the article was to introduce a thought experiment to help folks who financially suffer under common misconceptions, as millions of aspiring homeowners are romantic about real estate, and spend more than they budgeted for that bigger house or bigger yard, or a chefs stove that is a total and utter SUNK COST, and then justify it by parroting that "Your home is your biggest investment" expression. This is false, and I recommended people not live above their means by purchasing a trophy house, and instead live below their means and re-INVEST the rest into....drumroll............... real estate; rehabbing, flips, rentals, multi-family, etc.!  The bulk of the rebuttals of my article are going something like this: "Oh yeah?! Well, I [insert investment strategy here], and made [insert dollar amount]." To which I say, of course you did! There are millions of home owners who still can't sell their property for what they paid for it 10 years ago, and have 10 years worth of outdated color schemes, wear and tear, depreciated appliances, etc. The maximum debt-to-income ratio was 43%, Fannie raised it the DTI ceiling to 50 percent. This is not financially savvy. This is not real estate investing acumen.  Sure - their home appreciates, but as I said, those profits will be evaporated by the cost of selling the home plus the costs of interest, among other things. And I repeat: Equity derived from your principal payments is not profit, equity is savings. Would you classify your bank as an investment if you deposited money into your savings each month and then withdrew it 5 years down the road? What did they do for your money other than hold it? The only profit in your primary residence is the difference between what it was worth when you bought it and what it is worth when you sold it (appreciation). And what I'm saying which has yet to be challenged  is that when you deduct all the mortgage interest and Realtor fees, you clearly lose money. 

If you think primary, residential real estate is profitable, I'd love to see the calculus that proves it, rather than listen to anecdotes that involve principal payments because those aren't profits.

@Mindy Jensen I don't think anybody even implied your homes are bad investments, because your strategy is profitable and isn't applicable to the main point I made.  What you're doing is using real estate as an investment, e.g., rehabbing (buying ugly houses and fixing them for profit), which falls under the investment header.  As I mentioned, real estate is a great investment vehicle if treated like an investment. I created the discussion to shed some light on the notion that typically residential real estate ownership (again, not what you're doing), is not profitable. Most people are purchasing property at nearly 50% debt-to-income, living above their means, using property as a trophy and not an investment, and the appreciation they do accrue is wiped clean in selling fees and interest to the bank. Their homes are not investments and this kind of home ownership is so unprofitable it caused a recession, where millions of folks to this day can't even sell them for what they bought them for TEN years ago!  

@Jay Helms Your anecdote is lacking vital data points:

1. ) What did you purchase your home for?

2.) What was the 'minimum' down payment?

3.) What was the total amount of interest you paid? 

Lets go from there. 

There is a lot of commentary surrounding the topic of whether to rent or buy (Regarding personal residences). A roof over your head is an expenditure. The rent-or-own paradox is about losing the least amount of money possible under the expenditure header. In my opinion, residential real estate is a better alternative to renting, but don't get it confused: owning a home is not an investment in the traditional sense of the word. If your home was a restaurant or any other business you'd be losing money and would have to close shop. Consider the profit and loss: Mortgage interest, taxes and insurance, updates, upgrades, roofs, HVAC, condenser, etc., on the expense side, and monthly appreciation on the other side just barely keeping up with inflation. Principal payments are not profit, they are merely savings. The only return on investment is the % of additional value the home has accumulated when you go to sell down the road (if the market doesn't go down, or stay stagnant).

And if you use a Realtor to sell your home, don't you dare call your home an investment or an asset. Again, your profits is the difference between what you paid and what you sell it for.  Consider this: It costs $30,000 to sell a $500,000 home. If you're average monthly principal payment was $700, the commission to sell costs 42 straight months (3.5 years) of those equity payments. Make $120k a year to be able to afford that home? That's 5 months of your after tax (30% bracket) salary. Scale it down to make it relevant to you, e.g., $250,000 home, $15,000 commission, $60,000 a year salary.  It's all still the same....These fees are to your profits what a V12 engine is to gasoline. 

If the goal is to be super frugal - when you buy, purchase something below your means where the mortgage debt is 15-20% of your monthly income. Get a 15 year loan and double your mortgage payments to leap frog the amortization schedule, getting the bulk of the payment to go toward principal and not interest.

If your goal is to use real estate as an investment vehicle, purchase apartment buildings or single family homes and rent them out. Hold them long enough to realize half decent appreciation.  Appreciation averages out better in the long term than what it is on an annual basis, so hold for two or three decades, not two to five years. 

In anticipation of some objections surrounding the Realtor bit, below is a peer-reviewed economic study that empirically demonstrates Realtors do not sell the home for more money than FSBOs, nullifying their argument that their marketing efforts of iPhone photography, and picture slide-show "virtual tours" will somehow sell it for more to cover the extra cost of the commission.

https://www.econstor.eu/bitstream/10419/38634/1/57...

The S&P crushed it last year... So I think of it this way: Buy apartments, and use that passive income to grow your portfolio. Real Estate doesn't require you to trade your time for returns, like trading your time for a salary and then trading your salary for stocks. 

S&P:

What say you?

@William Hochstedler

"You're quoting sources from 2007. A very different market then in every way, particularly regarding the market share of aggregators/syndicators."

Zillow, Trulia, Yahoo Homes market share has GONE WAY UP since 2007, which would only strengthen my point. Also, I can quote recent sources if you like.

"Claiming them to be a source of bad data is unsupported."

It is not unsupported if it can be repeatedly demonstrated how their methodologies are spurious and their outcomes are empirically false. For example, if I produce a study that says John Doe is a better Realtor than William Hochstedler because John Doe's average sales price is higher, you'd immediately point out how crazy that is because it says nothing about that location's cost of living, days on market, list price vs sold price, and most importantly, the total number of units sold. NAR repeatedly commits these cardinal sins of market research – making studies say what they want them to say. They got their "Realtors sell homes for 13% more than FSBOs" figure by comparing mobile home sales prices with single family realtor assisted sales prices. They divided the average fsbo mobile home sale price of $208,700 by the average sale price of a realtor assisted single family of $235,000 and got 13%. If this sort of thing is done in any other industry, your name is mud and everything you publish thereafter gets tossed in the crash can.

"I just read through a very interesting thread on how the might transform real estate. Maybe I'm turning into an old fart or the millenials aren't yet having the impact we're predicting in my market. But I'm not sure that these technologies are disrupting the industry as much as Silicon Valley would like to think."

Millennials didn’t create Homie, millennials didn’t create the blockchain, nor are either of them born out of Silicon Valley. Most of the people using homie and blockchain applications are not millennials. A blockchain is just a database connected to special computers all over the world. Its application for real estate and has to do with a more secure way of transferring title to a property and various record keeping. It doesn't affect residential Realtors, but it could surely affect title and abstract companies by improving the title search process. A county in Chicago and a couple of countries have already migrated their land registry records onto the blockchain for safer and immutable record keeping. No millennials involved.

“And I totally agree with you that the NAR greatly exaggerates the value of the Realtor as the vast majority are completely worthless. That doesn't mean the profession is.”

I agree with this sentiment. I would just add that a firm like Homie is speaking to a large base of consumers who agree, Realtors add value, but relative to the commission its very very very little value. For example, if you have a 500k home and earn 120K a year, it would take over FOUR MONTHS of your after tax salary to purchase the services of a Realtor to sell your home. Or look at it this way, it is over 3 years worth of monthly principal payments going right to the Realtors. Nobody would ever hire a Realtor if they first put all that money on their kitchen table and looked at it. But, because its theoretical money coming off the hud from their proceeds, I don’t think people truly think it over or feel the crushing weight of commissions against their ability to keep their hard won money by going fsbo. I think today’s consumers are learning from the Homie types of alternatives, that they should pay proportionally for the value of the services a realtor provides, and that we don’t need to keep the fixed variable commission model in the year 2018 and beyond. This isn’t 1925, where Realtors had to run contracts around, visit the courthouses, hand deliver things, etc.

Also, no Realtor or broker seems to be able to honestly explain why someone with a 500k home has to pay twice as much as someone with a 250k home. There isn’t twice as much marketing, paperwork, time, costs, etc. Its all the same. To the extent there are differences they clearly do not warrant twice the commission. People are beginning to realize this entire system needs reformation. That’s where homie comes in and to that end they shot up to the number 2 broker in Utah. They proposed we start with the question, what is the baseline cost to sell a home properly? Everything after that baseline is superfluously gouging people.  It’s really just a matter of time, 5 to 10 years in my prediction, until Realtors by and large are extinct and we look back at fixed 5 and 6% commissions and go, “What were we thinking!?

@ I disagree, FSBO alternatives by definition are after listings. Homie especially isn't fighting over buyers. At any rate, I don't think there are any studies or any data that show thousands of aggregation and syndication sites are driving buyers into the arms of Realtors. Toor lockbox company did research and found most buyers find their own homes and have no choice but to enlist the services of a Realtor to gain access to the property. Buyers today often describe Realtors superfluous, like commodities, or gate keepers.

I think what you said about sites pushing buyers to hire agents would be true if the market share was distributed more evenly between these thousands of search sites you referenced. That would show they are in fact noticing them and engaging them. You were right in that most buyers go online, but they go straight to Zillow, Trulia, Yahoo homes and Realtor.com who are unambiguously the number 1, 2, 3 and 4 search sites, by a very wide margin.  It would seem buyers aren't noticing, acknowledging or distracted by the noise. 

Also, I'm curious, is there data to support your claim that FSBOs are having a harder time selling? Two independent studies (Real studies / not a spurious study paid for by NAR to get the results they want) show the complete opposite. Stanford and Northwestern University concluded from their studies that homes sold without an agent sold for an average of 4-11% higher when no agent was involved.

Sources:

https://www.statista.com/statistics/381468/most-po...

Assuming we aren't talking about multi-families and rentals, if we're talking about residential real estate, folks not living below their means is why this question has so many different answers. The problem is that homes are more like trophies or toys for most people, not a vehicle for increasing one's net wealth.  A modest property is a way better alternative to renting but striving to live up to the Jones' just sucks the fuel from the rockets on your net worth trajectory. Also, if we are keeping it real here, the cost of selling your home really blurs the line between asset and liability.

For example: If you sell a home for $300k, and the Realtor convinces you into paying 6%, that $18,000 in commissions is 40 months worth of average principle payments (equity) for a 5% down mortgage.  Another way of looking at it is if you make 75 grand a year, the commission is more than 3.5 months of your after tax salary.  I can't personally see how residential real estate as an investment is anything but a feel-good conversation or justification. 

Hey all - trying to be helpful and meet people along the way.  There's a really interesting backstory to this property. The owner is an investor - paid cash last March and gutted it. After some problems with the contract he now wants to sell and move on.