Monday, September 2, 2013

Investment Report: new home in Ashburn, VA as of Sep 2013

Below are the new homes available for sale in Ashburn that are closest to future metro station. In general, I am personally very bullish in Ashburn as the city has a lot of high income residents and a lot of things are coming there including the metro rail and world trade center (this is the same world trade organization in other major cities: http://www.wtca.org/)! Contact me if you are interested in any of them. All 3 homes has similar returns on investment.


1. Townhome styles condo (3 beds, 2 bath, 1 car garage, 1642 square feet) starting at $335K, monthly HOA at around $200 per month. Good location, close to future METRO (maybe coming in 2017), monthly rent at around $1900. A bigger version of similar home is also available starting at $365K (2600 sq foot, monthly HOA $260, monthly rent $2350)
Address: 0 ASHBURN VILLAGE BLVD #., ASHBURN, VA 20147
Return: if paid in full assuming 3% annual appreciation, the Internal Rate of Return should be around 8.3% with annual cash flow of around $12K. If finance with 25% down, the IRR should be around 12.2% with annual cash flow of around negative $4K.

2. 1 car town home (3 bed, 2.5 bath, 1800 SQFT) starting at $404K. monthly HOA $86. rent around $2000. I rented a home in this community in Jul 2013 for $2050: that home has around $20K in upgrades.
Address: 43475 RICKENBACKER SQ, ASHBURN, VA 20147
Return: if paid in full, the Internal Rate of Return should be around 8.1% with annual cash flow of around $13K. If finance with 25% down, the IRR should be around 11.7% with annual cash flow of around negative $5K. Assumes 1 month vacant every year, 3% annual appreciation in next 30 years.

3. Two car town homes (2161 SQ FT, 3 beds, 2.5 bath, $100 monthly HOA, two levels only), close to future metro starting at $470K. Monthly rent is unknown, my guess is around $2500
Address: 22019 MILLWICK TER, ASHBURN, VA 20148
Return: if paid in full, the Internal Rate of Return should be around 8.5% with annual cash flow of around $18K. If finance with 25% down, the IRR should be around 12.6% with annual cash flow of around negative $4K. Assumes 1 month vacant every year, 3% annual appreciation in next 30 years.

All new homes available for sale with less than $700K in Ashburn is available here.
Here is the development plan for the world trade center in Ashburn: very impressive.

Thursday, July 4, 2013

Useful Tips for Home Bidding

1. If you plan to submit an offer for a home for full asking price and you feel there might likely be other buyers willing to do similar things, then you should always give $1K more than the asking price. This strategy will significantly increase your chance of willing as a lot of buyers will stop at the asking price. I recently won a contract by using this strategy. The home was asking for $319,900. I submitted an offer for $321K, which is $1K more than the asking price. After we won, the seller agent told me that she had two other offers at $320K, which is just the asking price.
2. If you are thinking about significantly increase the price from the asking price, you should always use an escalation clause to make sure you won't over pay. You can just increase the price by $1K till your maximum acceptable price. Since the escalation clause require the seller to provide a copy of the other competing contract, the chances that the seller agent is tricking you would be low. For example, if the house is asking for $850K and you are willing to pay $880K. You should always wrote the contract to start at $850K and then increment by $1K till $880K instead of having a contract directly at $880K. I recently bidded a home asking at $850K and submitted the contract that way. Even though I did not win (the home was sold for $900K with 10 offers all of which is above asking price), I still feel I used the right strategy. I wonder if the $900K buyer would still win if he submitted $885K though. The link for the home is below in case anyone is interested.
    http://mrislistings.mris.com/DE.asp?k=3375980XNQcc&p=DE-205927789-474
3. Other than the price, I would recommend waiving the fulling contingencies to increase your chance of winning. This contingency include:
    appraisal contingency
    finance contingency (you should always do your finance eligibility on the mortgage before you even consider buying the home)
    lead base paint contingency if house is built before 1978
    termite inspection: instead of having seller pay for it, you can pay this yourself: it costs around $50. If there is any issue, the seller is always responsible to clean it up before the sale.

For reference, I have two other posts regarding the home bidding strategy. I am a big fan of strategy optimization and I would love to discuss the home bidding strategy with anyone who is interested. Share with you on any of your comments here
How much you should pay for your dream home?
Game Theory and Home Bidding Strategy


Sunday, May 5, 2013

Antitrust law and real estate

Sherman Antitrust Act is the law which is intended to encourage the freedom in pricing so that a few big players would not collude to take advantage of the customers. For example, if Microsoft, Google and Apple reach an agreement to all raise their mobile platform price by 200% and keep the prices fixed for the next 5 years, the consumer would not have much choice but to pay the higher prices because there is really not much other choices other than those three providers in terms of mobile platforms. If they work together and try to fix the price so that they would make much more money at the expense of regular consumers, they would subject to severe penalty under the Sherman antitrust act.

In real estate, the antitrust law also applies in that no two or more real estate brokers or sales person should work together with the intention to fix prices on real estate transactions. For example, they can not say that they'll all charge 3% for buyer commission and never lower the price. As a result, all real estate professionals are recommended to price their service as they see fit.

That being said, I am really struggling to understand why in maybe 99.9% of the residential real estate transactions I see on mris in metro DC region, all of the real estate publications had priced the buyer commission at 3%? Why everyone is adopting this 'industry default' pricing? I know some real estate processionals gives rebate so that the 3% is absolutely not the final price: but still, the fact that almost all transactions had the 3% buyer commission is kind of strange under the free pricing principal.

More importantly, does that mean that the residential real estate industry pretty much failed to honor the metric of the Sherman Antitrust Act?

I actually had a pretty length discussion with a lawyer friend of mine on this issue and below are the summaries of the discussion.
1. there is no evidence that anyone is trying to intentionally fix the buyer commission at 3%. Instead, everyone seems to choose to follow the 'industry default' pricing at 3% volunteerly. This basically says that there is no violation of the antitrust law;
2. as long as there is no proof of intentionally fix prices at 3%, it's very hard to win the case in front of the judge on who is responsible for the fact that everyone is actually charging 3% at buyer commission; 
3. there are a lot of other industries that people usually charge a 'industry default' price. For example, you'll find a lot of plumbers charges exactly $80 or $100 per hour, or a bottled water regardless of the brand is priced at $1.50 at most vendor machines. That is another case of choosing the 'industry default' pricing volunteerly;

I have to agree with the summary above that real estate is indeed priced freely. But at the same time, I am really struggling to believe that everyone seems to accept the 3% as the default industry buyer commission. I'd love to hear your opinion on this. Please leave me a note here.

Saturday, April 20, 2013

Title Insurance Explained

What is Title for Home
Home Title is the certificate to show the home ownership, just like car title. When you purchase a home, you are purchasing the home from one or multiple current home owners. After the real estate transaction, the title of the home is transferred from current home owners to you. One thing you want to make sure is that all the owners of the home have been identified and all of them have signed the contract to transfer the home ownership to you. The process of identifying all the current home owners is part of the title research done by the title company.

Why Home Title Insurance is necessary
Just like car insurance, home title insurance covers the situations that when there are dispute on the title of the home, such as from previous home owners who were not identified in the title search, or from uncollected executed transfer of title.

For example, A purchased a new home. A has two sons: A1 and A2. A2 went to Europe and has been living there for the last 20 years. After A passed away, A1 inherited the home, which he sold to B. From the title search, A1 is the only owner. After B purchased the home, A2 came from Europe with A's original will, which basically said that A intends to give the home to A2 only. As a result, the previous sale of the home from A1 to B might not be valid. The fact that only A2 has the original will from A is impossible for anyone else to know. So such things will never be discovered during the title search.

When this happens, the title insurance will cover any costs for B. That's the benefit of Home Title insurance.

Title Insurance: lender portion and owner portion
When the buyer purchase the home with the mortgage, the title insurance can be divided into two portions: lender portion and owner portion. For example, if a house is sold for $500,000 and the buyer put down payment of 20%, or $100,000. Then the lender portion of the title insurance would cover $400,000. The owner portion of the title insurance would cover $100,000.

All lenders require borrows to purchase title insurance for the lender portion of the home. So the lender portion of the title insurance is mandatory and everyone with mortgage would be required to buy it.

However, I think 99% of the buyers does not even know that the owner portion of the title insurance is optional. So the buyers does have a choice of not buying it. For a owner portion of the title insurance of $100,000, it would cost around $2000 for a basic policy. When I bought my first home, I did not even know that I have a choice of not buying the owner portion. And as far as I know, the actual probability of the title have any issue in the next 10 years is less than the probability of winning lottery. So personally, I am leaning towards not buying the owner portion of the title insurance when I buy my next home.

Please always do your own research and decide whether you want to buy the owner portion of the title insurance. All I want to say is that the owner portion of the title insurance is optional.

Below are a few website that you can get quote for the title insurance:
• Fidelity National Title: http://ratecalculator.fntg.com/default.aspx?brand=fntic
• First American Title:http://facc.firstam.com/public/default.aspx
• Chicago Title: http://chicago.title.com/ on the left sidebar

I want to know whether you want to buy the owner portion of the title insurance. Leave me a note here.


Tuesday, April 16, 2013

When to buy a point when you apply for mortgage

1 point in loan will cost you around 1% of the loan amount; the benefit is
that your interest rate will be reduced by 0.25%

for example, if you apply for a 30 year fixed loan with amount of $500,000
at interest rate of 3.5%.

if you decides to buy a point, it would cost you an additional $5000 at
closing. your interest rate will be reduced to 3.25%.

some basic break even analysis will help you decide whether you should buy
the point:
at 3.5% with no point, your monthly payment would be 2,245
at 3.25% with one point, your monthly payment would be 2,176

so you save $69 each month. It costs $5000. So it takes around 72 months to
break even. In other words, if you don't refinance or sell your home in 72
months, you should buy a point. Otherwise, you should not.

Sunday, April 7, 2013

My blog schedule and topics

How much you should pay for your dream home? bidding strategy analysis
Game Theory and Home Bidding Strategy
When to buy a point when you apply for mortgage
Title Insurance Explained: lender portion and owner portion
How to compare settlement company charges (4/27/2013)
Price Fixing? Antitrust law and real estate industry (5/4/2013)
Investment Property series -- part 1.1 The important of Cash Flow (5/11/2013)
Investment Property series -- part 1.2 When to bet on Appreciation (5/11/2013)
Investment Property series -- part 2 Return on Equity (5/11/2013)
Investment Property series -- part 3 How to find a good deal (5/18/2013)
Investment Property series -- part 4 How to flip a house (5/25/2013)
Investment Property series -- part 5 How to build your own house (5/25/2013)
Investment Property series -- part 7 Market Trend and your strategy (6/1/2013)
Buying your first home series -- part 1: the whole process dummy down (6/8/2013)
Buying your first home series -- part 2: things to consider when buying (6/15/2013)
Buying your first home series -- part 3: location, location, location (6/22/2013)
Buying your first home series -- part 4: how to read your contract (6/29/2013)
Buying your first home series -- part 5: Common contract contingencies (7/6/2013)
Buying your first home series -- part 6: Mortage: Fixed rate and variable rate (7/13/2013)
Buying your first home series -- part 7: Closing and moving in (7/20/2013)
Buying your first home series -- part 8: Wise Investments on your home (7/27/2013)
Buying your first home series -- part 9: Get ready to buy your second home (8/3/2013)

schedule subject to change without prior notice :) I think I talked too much to lawyers

Saturday, April 6, 2013

Game Theory and Home Bidding Strategy

Please read this post first before reading the content below.

The optimal bidding strategy will need to be optimal in two components: (1) how to determine the price for your bid; (2) when to submit your offer. This post will not even try to help you how to determine the price for your bid: actually you should always be confident and comfortable to determine that price on your own: if you are not comfortable, then don't submit the offer. Talk to your buyer agent or do some more research to get there. Alternatively, drop me a note here.

Once you have determined the price for your bid, now let's think about what's the optimal strategy in terms of when to submit the offer.

Let's use an example: let's say you are interested in a home listed at $500,000. The analysis you did tells you that the fair market value for the home is anywhere between $450,000 to $480,000.

1. if you decides that your starting bid is somewhere in the fair market value, such as $440,000 to $460,000, then your bidding strategy is regular strategy. In this case, you should submit the offer whenever you are ready, there is really not much to optimize under the regular bidding strategy.
 2. if you decides that your starting bid is around $400,000, which is significantly below the fair market value, then you need to think about this question: when should you submit the offer? You will need a little bit of game theory concept to decide when to submit the offer.

Based on Wikipedia, game theory is defined as "the study of mathematical models of conflict and cooperation between intelligent rational decision-makers." It sounds complicated but its core concepts is very simple. Let's dummy down that concept with a brain teaser, which I was given when I was interviewing with a wall street firm back in 2005.

Let's assume 3 cowboys decided to participate in a shootout competition. At the end of the competition, only one of them could survive. They already know each other pretty well on how accurate they could shoot: A is the perfect shooter and can kill people with 100% probability. B is not as good, only at 70%. C at 30%. They also agreed on the following: (1) they will take turns to shoot at each other, one shot at a time; (2) since C is the worst shooter, C will shoot first, then B, then A, then back to C, then B, then A, etc. (3) the competition will end when there is only one people survive.

Question: if you were C, what would you do to maximize the probability of survival?

This is a typical game theory question and the answer lies in analyzing your opponents, which in this case are A and B. Let's assume C shoots at either A or B and missed, what would they do after the shot if they are still alive? B obviously will shoot at A because A is the much bigger threat than C. B also knows that if A gets to shoot, A will shoot B because C is much worse than B. Now given the fact that both A and B perceives each other as the biggest threat, C could actually sit back and let them fight till one of them is dead. When C goes into the final duel with either A or B, the most important thing for C would be to shoot first, which will give C at least 30% chance in survial. Otherwise, if either A or B shoots first, C will have less than 30% chance in survival.

So the answer to the question is: C should actually intentionally miss his first shot, which means that he should shoot to the sky. (Yes, that's an option in case you are wondering).

Again, game theory basically says you should study your opponents and figure out what they would do and then decide your strategy accordingly. Now let's go back to the low balling strategy and look at what the seller should do when you submit a low ball offer.

Let's first assume the house you are bidding just came to the market and you are among the first few people to see it. You really have two options to submit your low ball offer: (1) submit right after you see the house (most people actually will do this); (2) wait for a period of time, such as 3 weeks and then submit your offer. Which one is better?

Let's again analyze what the seller would do under each of the options. Please remember the fact that the house just came to the market, which means not a lot of people have seen it. If you submit the offer immediately, the best strategy for the seller is to not counter your offer, but wait for other offers to come in and use your offer to pressure other buyers. The key word is potentially 'use your offer to pressure other buyers', which will really hurt you and is the worst thing you want to see as the buyer. This is the downside of submitting the offer immediately. What's making this option worse is that there is actually no upside at all because
o   no rational seller will give you a meaningful counter offer or go directly under contract. This is what most low ball buyers hope but the seller actually wants to wait for a few more weeks at least to see whether there are any buyers who are regular buyers or overbidding buyers. Like I mentioned earlier, the seller should just keep your offer in his pocket and potentially use it against you when there are other inquiries;
o   you are not missing out on any opportunity cost of waiting for a few extra weeks either because if the house is sold within the first few weeks, there is almost no chance that it would be sold under the low ball price.
o   Your overall goal is for the house to be sold at a lower price, either to you or to other buyers. Yes, even when the house is sold to other buyers not you, you also want it to be sold at lower price because chances are good that there will be other homes up for sale in the same neighborhood. The lower sold price on this unit will lower the 'listing price' for the future sales because the pricing for future sales would be based on this sale. if you submit the low ball offer and later, there is another buyer who are regular buyer. Once he learnt the fact from the seller that there is already one offer pending for this house (just in case you don't know this already, the other buyer would not know your bid price because the seller would only tell the fact that there is one offer pending but not the actual price), he would be pressured to bid up his price a little more, which is not to your benefit.
o   Your offer would not discourage any other low ball buyers. let's assume there is another potential 'low ball' buyers who are also interested in the house. You would hope that your low ball offer would discourage him from even submitting the offer and go to bidding war with you. I don't think that would work. Here are the reasons: (1) low ball offer will only come under contract after the house has been on the market for at least a few weeks; (2) by then, the other buyer should be able to figure out that the sold price should be much lower than the listing price and there is no cost of try to submit an offer regardless.

To sum it up, you should never submit any low ball offers when the house is on the market for less than 3 weeks. The actual 3 weeks number can still be debated but the idea is really to wait for the house to be market tested before you go for it. After 3 weeks, you can do whatever.

Regarding the overbidding strategy, your goal is really try to reach a deal with the seller as soon as possible to avoid potential bidding wars with other buyers. The key for success in this strategy is quick and convincing. Quick refers to the timing and you submit as soon as possible and follow up aggressively with the seller. Convincing refers to the price should be just enough to make seller accept it, which should be analyzed case by case. In essence, the overbidding strategy is to pay a premium on top of the asking price to avoid the possible bidding wars with others. You should only use this strategy when you absolutely love the house at your overbidding price.

Thank you for reading this! I want to hear from you. Leave me a note here.