Prices and Perceptions

Jim Freeman (Coldwell Banker Park Shore) — Thu, 06 Dec 2007 15:40:37 -0600

I was having a conversation with a prospective real estate investor the other day. He is very concerned that prices in western Washington State would continue to tumble much like other areas of the US. He said that it seemed like bad timing to buy now. He would rather wait it out to know that the bottom has been reached before venturing back into the water.

I was particularly interested in his point of view because he has proven to be an adroit owner/manager in a non-real estate related business and I respect his abilities. I had to ask the question though: "Isn't it better to buy when everyone else is selling and sell when everyone else is buying?" "Yeah," he offered "but it just doesn't feel right."

Well, I can't "kill the feeling" but this was a good example of why otherwise rational people exhibit crowd behavior. Markets interest me. Human behavior interests me. So, I study these topics, for my interest in them and also to become a better advisor for people seeking to buy and sell real estate.

One book that offers invaluable insite on this topic is "Influence , Science and Practice" by Robert Cialdini is one that has helped me understand herd behavior. I think it falls mainly into the area that Cialdini would call social proof. In other words, we have a powerful tendency to act only when our peers approve of our actions. This may explain why so many people will wait to see prices rise before wading in to buy themselves.

A highly respected Yale economist, Robert Shiller, has also written on this point. In his recent book, "The New Financial Order" he makes a powerful case that market behavior is irrational, i.e. that pricing and trading decisions in any market, securities and housing included, traders are making decisions based upon how they feel and not on measurable (ratio-able) data benchmarking prices to some solid index of values. Shiller has some very interesting ideas about creating what he calls macro markets to insure individuals and groups against financial catastrophes and even guarantying the incomes of people.

Ken Fisher, Forbes 400 billionaire and highly successful money manager in his book "The Only Three Questions That Count" discounts Shiller's abstractions somewhat. What gives Fisher some street cred over Shiller is that he is in the trenches trading for his and his clients' wealth. He is arguably one of the most successful money managers of all time. He states categorically that when consensus sentiment is bearish it is an excellent indicator that it is time to buy.

Coming back to my investor friend though, I can't help but think that our view of investing, particularly real estate investing, is distorted first and mostly because we look at it all wrong using market price abstractions and secondly because market behavior is itself irrational. What I mean is that the right price for housing shouldn't be a speculative exercise and that investors should be rewarded for adding value to the process of helping people become homeowners and not because they were clever or lucky at financing housing inventories held back form delivery to a homeowner. When I tried to explain this to my friend, he was unable to let go of his perceptions of the power of market volatility and timing.

I sincerely hope that we might be able to develop systems of housing finance and trade that doesn't cause so many unfortunate outcomes due to swings in housing markets. What do you think?

Rent To Own Houses, Big Opportunity For Both renters and Investors

Jim Freeman (Coldwell Banker Park Shore) — Mon, 23 Apr 2007 22:59:30 -0500

Rent To Own Houses Gives New Opportunity For Aspiring Homebuyers

The financial troubles of sub-prime lenders like New Century Mortgage Corporation has cast quite a pall over the financial markets and prospects to purchase homes with less than prime credit. This has had a dampening affect for hosuing markets across the country but as is usually the case it has been way overblown.

Zero down home loans are still available for credit worthy buyers ( a FICO score of 640 is usually a minimum threshold). There are also a number of first time homebuyer programs available to assist with down payments, counseling and lender referrals.

My Guaranty Home Sales Team in Kitsap County, Washington offers a third alternative for the growing class of sub-orime buyers through our lease to own program. We offer tenants an opportunity to lease own home of their choosing with a firm option to purchase within a two year period. Within that 2 years we work with them to raise their credit scores and take title to the property. After qualifying them for our program we give them a slected list of homes that we determine would be in their price range, allow them to select form that list the home they would like to own and then match then with an investor to purchase the home, lease it to them and grant an absolute option to purchase the home for afixed price at any time within the two years. Getting people into a home of their choice and helping them qualify for the money to purchase it offers multiple benefits for these individuals. It is truly rewarding to help struggling families obtain the home of thier dreams.

Giving renters who would otherwise be excluded from financing to acquire a home is very beneficial to them. But wait,... it is also a very attractive investment strategy. What is does that is so beneficial to the investor is that our method of qualification, incentives and management remove or greatly reduce the "friction points" inherent in the landlord-tenant standard relationship. This is the best way for people who have limited means to get started in real estate investing to avoid the pitfalls of property management, leasing, vacancy and all of the other headaches that real estate investing gurus don't really want to talk about in their high priced investment seminars. By the way, our more seasoned investors are so happy to use our system that they now don't do anything else. Everybody wins in this arrangement.

When I say everybody, I mean cooperating or referring agents too. Think about it. A referring agent can earn income from deals that they are unable to write themselves because of poor buyer credit. That's pure profit. And when we find agents that we like to work with regularly we will enter into a reciprocal referral arrangement wit them, particularly in markets outside our region of expertise in Kitsap real estate, Bremerton real estate, Silverdale real estate and Port Orchard real estate. Rent to own houses can apply to existing Port Orchard homes for sale or new homes in Port Orchard.

Like I say, everyone wins.

Jim's Blog

Prices and Perceptions

Rent To Own Houses, Big Opportunity For Both renters and Investors