Are You An Investor Or a Gambler?

Posted on December 26, 2007

Warren Buffett is a big proponent of the Margin of Safety Principle. This principle holds that “one should not make an investment in a security unless there is sufficient basis for believing that price being paid is substantially lower than the value being delivered.” “…Investing strategies that do not employ this comparison of price and value are really not investing at all, but are rather speculation – the hope that price will rise, rather than the conviction that the price being paid is lower than the value being obtained.”

This Principle, when applied to the real estate market, very simply explains the nature of the down-turn in the housing market that we’re currently facing and offers an attainable near-term solution.

We would not be in the situation we’re facing had real estate investors outnumbered real estate speculators. For the last few years, buyers didn’t give a hoot about price-versus-value concerns. They paid whatever sellers demanded on the speculative hope that the home prices will rise and that homes will sell for more than what was paid. And they did – at least for a time. Fueled by one or two solid economic principles – and a lot of hype – prices rose steadily for four straight years and the real estate speculators – masquerading as investors – cashed in on their good fortunes.

Real Estate Investors were few-and-far-between during this time. Folks were buying without regard for the value they were receiving in hopes that appreciation would drive gain. Appreciation should have been the icing on a cake composed solid economic principles (commodity value, cash flow, demand from homestead buyers and not investors, just to name a few). But in many cases, the icing was masking little more than a stale crumb. Once the icing disappeared, everyone realized just how little value they had received.

The point is, had buyers paid less than the value they were receiving, without regard for appreciation – they would not be in this mess. They would own assets that would be currently producing more money than they were consuming, or that could at least be sold for equal to (or more than) what was paid. No icing, but a pretty good cake, none-the-less.

The solution to the mess we’re in is simple – at least for real estate investors going forward. Pay less than the value you are currently receiving from your investment. It’s that simple. Don’t base the price you pay on projections of what value could be. Base the price you pay on the value there is, and make sure the price you pay is less than the value you receive. Projections should never be relied on in investment valuation. They may be sexy and enticing, but they’re not reality… and may never be.

Price and value: knowing the relationship between the two is the difference between an investor and a gambler. Which are you?

Peter Murphy is Co-Founder and Head Broker at Home Encounter, a Tampa-based real estate Consultancy with specialties in Residential & Rental Properties, Investment Real Estate, Property Management and Land & Commercial Properties. Murphy’s analysis of the Tampa Bay housing market is featured extensively in local media and in trade publications, including the St. Petersburg Times, the Tampa Tribune, the Tampa Bay Business Journal, the Lakeland Ledger, and the Orlando Sentinel. He has appeared on ABC Action News and Bay News 9 for his reporting on significant local developments in the real estate market. He is a regular contributor to Fox’s 970 WFLA news broadcasts and is a guest panelist on Fox 13s “Your Turn”, where he consults on local and national real estate market issues. Murphy has a B.S. in Economics from the University of South Florida and an MBA with an emphasis in Finance, Economics and Marketing from the University of South Florida School of Business. He resides in Tampa with his wife and child.

Why Foreclosure Rates Fell in November… A Theory.

Posted on December 19, 2007

On December 19th, RealtyTrack reported that foreclosure filings dropped by 10% from October to November (although foreclosures are still up 68% from the year prior). Is the real estate market on the rebound? No so fast! We think there’s another reason.

The drop in November’s foreclosure rate is for the same reason that evictions fall off dramatically in November and December. No, dead-beat tenants aren’t suddenly becoming conscientious members of society. On the contrary, Judges and Lawyers – the folks who process evictions – are busy enjoying the holidays. They’re with their families; watching football, and enjoying a good turkey dinner. And the Sheriff’s office – the folks who enforce the eviction orders – they’re just as apathetic as about evictions this time of year. They’re not thinking about the eviction packets that are piling up on their desks. They’re dreaming about Christmas shopping and pumpkin pie.

The eviction process ordinarily takes 3-4 weeks during normal times of the year. It takes 5-6 weeks during the holidays. And what about the landlords who are owned due-process, you ask? Forget them! They shouldn’t be so mean-spirited – it’s the holidays, after all!

And so it goes for foreclosures: The same Lawyers, Judges and Sheriffs who drop the ball on evictions are simply not motivated to process or enforce foreclosures during the holidays. November is bad – December will only be worse: We will likely see an equally surprising dip in the foreclosure rate from November to December as foreclosure filings stack up along side eviction paperwork on Lawyer’s desks. In the meantime, the people who are owed justice – the lenders who’ve been defaulted on and the landlords who can’t collect rent – are left holding the bag.

Foreclosures aren’t really down – they’re just hiding for a few months. A problem that is already bad is quietly being compounded by the fact that lenders can’t foreclose and landlords can’t evict for 6-weeks out of every year.

Our economy can’t take much more of this inequity.

Peter Murphy is Co-Founder and Head Broker at Home Encounter, a Tampa-based real estate Consultancy with specialties in Residential & Rental Properties, Investment Real Estate, Property Management and Land & Commercial Properties. Murphy’s analysis of the Tampa Bay housing market is featured extensively in local media and in trade publications, including the St. Petersburg Times, the Tampa Tribune, the Tampa Bay Business Journal, the Lakeland Ledger, and the Orlando Sentinel. He has appeared on ABC Action News and Bay News 9 for his reporting on significant local developments in the real estate market. He is a regular contributor to Fox’s 970 WFLA news broadcasts and is a guest panelist on Fox 13s “Your Turn”, where he consults on local and national real estate market issues. Murphy has a B.S. in Economics from the University of South Florida and an MBA with an emphasis in Finance, Economics and Marketing from the University of South Florida School of Business. He resides in Tampa with his wife and child.

Why People Don’t Trust Realtors

Posted on December 18, 2007

On December 11th, the National Association of Realtors (NAR) published a press release entitled “The Worst is Over – Existing Home Sales to Trend up in 2008″. It wasn’t picked up by many major publications for one main reason: It was wrong.

The article honed in on one positive indicator – that existing home sales are forecasted to trend up in 2008. Citing “postponed sales activity” in the fourth quarter of 2007, chief NAR economist Lawrence Yun projected that sales will remain at “fairly stable to slightly higher” levels over the next couple of months. “The broad trend over the coming year will be a gradual rise in existing-home sales, commented Yun, “but because sales are exceptionally low in the final months of 2007, total sales for 2008 will be only modestly higher than 2007.”

Yun and the NAR chose to base their statement that “The Worst is Over” in the housing market based almost exclusively on the projected increase in the number of home sales in 2008. Buried in the inconvenient details of the press release were statements that home prices will be virtually flat in 2008, that unemployment will increase, and that mortgage interest rates will rise. Absent from the report were statements addressing the impact of foreclosure and short-sale inventory on prices; there were no comments on mortgage rate adjustments; and absolute silence on the lack of property tax and home owner’s insurance reform.

This press release represents what frustrates people the most about Realtors – an unconscionable misrepresentation of the facts, a seemingly willful inability to see things from the eyes of the marketplace, and a consistent lack of reality in data interpretation. The Pollyanna statement that “The Worst is Over” seems irresponsible in light of the omission of all the factors that could prove it flatly false. If NAR had examined the trend in short sales, the market impact of bank- and distressed-sales, and the decline in home values and appraisals that has resulted from these things, they never would have said “The Worst is Over.”

At the end of 2006, the NAR predicted a slow but reasonable growth in the national real estate market for 2007. Quite obviously they were wrong, and they revised this prediction down no less than four times in 2007 almost as though it took them a full year to figure out how wrong they were. We hoped they would have learned their lesson this year, but no chance. In the middle of this down market, NAR predicts a sunny 2008 – and they wonder why people don’t trust Realtors.

Peter Murphy is Co-Founder and Head Broker at Home Encounter, a Tampa-based real estate Consultancy with specialties in Residential & Rental Properties, Investment Real Estate, Property Management and Land & Commercial Properties. Murphy’s analysis of the Tampa Bay housing market is featured extensively in local media and in trade publications, including the St. Petersburg Times, the Tampa Tribune, the Tampa Bay Business Journal, the Lakeland Ledger, and the Orlando Sentinel. He has appeared on ABC Action News and Bay News 9 for his reporting on significant local developments in the real estate market. He is a regular contributor to Fox’s 970 WFLA news broadcasts and is a guest panelist on Fox 13s “Your Turn”, where he consults on local and national real estate market issues. Murphy has a B.S. in Economics from the University of South Florida and an MBA with an emphasis in Finance, Economics and Marketing from the University of South Florida School of Business. He resides in Tampa with his wife and child.

Foreclosures, REOs, and the Transfer of Wealth

Posted on December 13, 2007

I received a call from a colleague late last night. Another REO was getting ready to come on the market… the kind we like; distressed, bad neighborhood, the definition of an “ugly” home.

We are particularly interested in this property. It’s part of an entire block of multi-family homes that went into foreclosure a year ago. The buyer at that time paid $70,000 a unit for these properties and then walked away, leaving them to slip into disrepair. 12 months later, every window is smashed, every door is broken… even the copper wire and the a/c duct-work was missing. All 24 units were in the same awful condition.

Structurally, these properties were sound… they looked at lot worse than they really were. We knew that we would end up sinking $10,000 into each unit, but we also knew that once they were repaired and occupied, they would retail at $50,000 per unit, even in a slow market.

Multiple banks were involved in this foreclosure – six, to be exact. six banks would have to go through the painful process of realizing that they had been duped, discovering what they were left with, and resigning themselves to taking much less in a distressed sale than the $70,000 in debt that they currently held on each unit.

For the last 3 months we’ve been putting these units under contract. The going rate: $20,000 per unit. The bank is willing to take a $50,000 loss per unit just to get these off their books. In turn, we’re left with a growing portfolio of apartments that we acquired at $20,000 per unit, restored for $10,000 per unit and that are conservatively worth $50,000 per unit. That leaves us with $20,000 per unit in equity on every apartment we buy.

It will take upwards of 12 months to close on all these units. When we do, we’ll have paid $720,000 to acquire and restore an apartment community worth $1.25 million – a 75% return on our money, and that’s before we consider the cash flow generated by the community.

The Lenders’ loss is our client’s tremendous gain. While we regret the negative impact that this type of fraud and negligence is having on our economy, we are privileged to be able to step in and provide wealth generation of this magnitude for our clients and stakeholders.

The housing downturn will create many more opportunities just like this one. That means you will have many chances in the future to take advantage of the kind of situation described above. Do you want to be added to our list of interested buyers? If you do, send an email to info@homeencounter.com. We’ll keep you posted as deals like this one come available.

Peter Murphy is Co-Founder and Head Broker at Home Encounter, a Tampa-based real estate Consultancy with specialties in Residential & Rental Properties, Investment Real Estate, Property Management and Land & Commercial Properties. Murphy’s analysis of the Tampa Bay housing market is featured extensively in local media and in trade publications, including the St. Petersburg Times, the Tampa Tribune, the Tampa Bay Business Journal, the Lakeland Ledger, and the Orlando Sentinel. He has appeared on ABC Action News and Bay News 9 for his reporting on significant local developments in the real estate market. He is a regular contributor to Fox’s 970 WFLA news broadcasts and is a guest panelist on Fox 13s “Your Turn”, where he consults on local and national real estate market issues. Murphy has a B.S. in Economics from the University of South Florida and an MBA with an emphasis in Finance, Economics and Marketing from the University of South Florida School of Business. He resides in Tampa with his wife and child.

The Home Encounter Investment Real Estate Team.

Invest now

Posted on December 11, 2007

As a Realtor for over 30 yrs I feel that I have seen it all in terms of ups and downs in the real estate market.  Thus I can give a little perspective to what we all should be doing in this down market.  Perhaps it is obvious, but investing, buying into this floundering market will make every investor look brilliant when the market recovers. 

And it will recover.  The Tampa Bay area is prime for recovery for lots of reasons, but for no better one than location.  We are in the central Florida corridor extending across the state through Orlando.  It is easy to see from past development that there is hardly any spot in the nation more desirable.  Consider Lakeland which lies along this corridor.  It has been booming.  And with no disrespect to Lakeland because it does have some nice lakes and natural beauty, golf courses and much to offer, it isn’t Tampa Bay from my perspective.

And who could disagree that this is the time to take advantage of the opportunities to buy.  I could go on and on about individual properties.  An example is a nice home in Temple Terrace, 4br/3baths, 2 story, 2 car garage on a beautiful corner lot in a great neighborhood valued at $250k two years ago, buyable now for around $185k.  And there are lots more–foreclosures abound.  This is a great time for investors.

Mike White. Senior Real Estate Consultant, Home Encounter.

Go Ahead… Ignore It. It Still Won’t Go Away.

Posted on December 11, 2007

Peter Murphy here, CEO of Home Encounter. I always wanted a Blog on this web site, but my decision to add one was hastened by a recent experience on Trulia – one of the many “new industry” web sites that are taking the real estate world by storm.

My company had just published the findings of its November Residential Real Estate Report – that the Bay Area Real Estate market is in for at least two more years of value declines of 9% or more before a recovery can be expected. I brought this up on a Trulia discussion board for the completely non-commercial purpose of generating discussion among my industry colleagues on our findings. What did other agents think about the findings? Had they heard complimentary or contradictory information? What did they think about the methodology used to generate the forecasts?Instead of the open discussion that I was expecting, I was called a Spammer and criticized for “Self Promotion of the Worst Kind” – among other things. For some reason, the fact that my firm had done the research nullified my question. Not one person responded to the data… not one. I was shocked… and disappointed. My colleagues displayed the worst kind of ignorance. Rather than looking at the facts, they shot the messenger, and they did it under the guise that I had violated the rules of the Trulia community.Well let me flagrantly self-promote for a moment: I am proud of the work that our Consultants have done in Home Encounter’s November Residential Real Estate Report. They did not run from the facts when they started to paint an unpleasant picture; they did not try to manipulate or rationalize the data. They understood – as we all should – that “the truth sets us free”. Their goal was to release the data to the public and thereby empower the marketplace with the information we all need to make the right decisions.Here are the results of the November Residential Real Estate Report: The Tampa Bay real estate market place is in decline – and will be for the next 2 or more years. This decline will hurt anyone who needs to sell their home quickly, especially those who bought recently. A lot of homeowners won’t be able to sell their homes for a profit for quite some time.You can’t “like” or “hate” this data. You just have to live with it. That’s the beauty of the truth.The truth gives us choices: we can avoid it like my colleagues on Trulia did, or we can face it head-on and use it to make better decisions, winning decisions, profitable decisions. We can criticize the media, the lenders, sub-prime borrowers, or our neighbors for getting us into this predicament or we can work to find a way out. We can shoot the messengers who tell us where and when we went wrong, or we can use the data these messengers bring to dig ourselves out of the hole we’re in. I gladly choose the later…. Home Encounter Consultants choose the later. So if you’re looking for someone to represent you in your real estate transactions; who will tell you the truth, even when it hurts; who know the truth and will gladly share it with you so that together you can make the best possible decisions; then pick up the phone and call one of our Consultants. Or join the discussion on this Blog. Ask questions. Answer questions. Engage in honest, open discourse on issues relating to the real estate marketplace.All those who seek or bring the truth are welcome here!

Peter Murphy is Co-Founder and Head Broker at Home Encounter, a Tampa-based real estate Consultancy with specialties in Residential & Rental Properties, Investment Real Estate, Property Management and Land & Commercial Properties. Murphy’s analysis of the Tampa Bay housing market is featured extensively in local media and in trade publications, including the St. Petersburg Times, the Tampa Tribune, the Tampa Bay Business Journal, the Lakeland Ledger, and the Orlando Sentinel. He has appeared on ABC Action News and Bay News 9 for his reporting on significant local developments in the real estate market. He is a regular contributor to Fox’s 970 WFLA news broadcasts and is a guest panelist on Fox 13s “Your Turn”, where he consults on local and national real estate market issues. Murphy has a B.S. in Economics from the University of South Florida and an MBA with an emphasis in Finance, Economics and Marketing from the University of South Florida School of Business. He resides in Tampa with his wife and child.

Welcome to the Home Encounter Blog…

Posted on December 11, 2007

…Where information on best practices, marketplace trends, and the Bay Area real estate market is shared with you – real time – by Home Encounter Real Estate Consultants.

Learn about real estate in Tampa Bay and the surrounding counties; Bay Area residential real estate; Tampa investment properties (duplexes, triplexes, quads, and large multi-family homes) and Tampa Rehabs and Restorations. Read the latest thinking on Tampa Bay foreclosures, short sales and the declining real estate market. It’s all here, provided for your education and enjoyment by the best real estate agents, brokers, property managers and investment strategists in Tampa. 

If you have a question that you would like to ask and you can’t find it on our site, email us at info@homeencounter.com and you’ll see a response from a Consultant within 24 hours.