A portion of our Texas Real Estate License dues goes toward funding the Real Estate Research Center at Texas A&M University. The Real Estate Center provides agents with press releases we are allowed to share. Below is the latest, which discusses the demographic shifts and population growth of Texas, both past future.

At the bottom is a link to the full article. It’s interesting stuff. If you don’t have time to read the entire post and the accompanying article, the takeaway is this:

Higher net migration (more people moving to Texas than moving out of the state) and the younger average age of Texas’ population should prove positive for real estate professionals. Both mean that more and more people will be looking for housing. The metro areas should continue to grow, while agricultural counties may continue to lose population.

Here is the write-up from the Real Estate Center, reposted with permission.

The Changing Face of Texas
By David S. Jones, Senior Editor, Real Estate Center
Release No. 23-0710

COLLEGE STATION, Tex. (Real Estate Center) — One word will have a significant effect on the future of Texas real estate – population.

More people are moving to Texas than are moving out. These new adult Texans need housing the day they arrive. That is more good news for a real estate industry that has already fared better most states during the latest economic downturn.

“Forty years ago, the Texas population was largely rural and Anglo,” said Gary Maler, director of the Real Estate Center at Texas A&M University. “Forty years from now, Texas will be largely urban and Hispanic.

“The state’s demographics will shift dramatically during the next several decades, and with change comes opportunity.”

In times past, Texas depended on “natural” increases for most citizens. That is, most Texans were born here. In the 1950s, 94 percent of the state’s population growth was of the natural variety. By the 1990s, just half of new citizens entered the state that way.

“The real estate implications are significant,” said Dr. Harold Hunt, a Center research economist. “Population primarily from net inmigration means there are more adults and more would-be homebuyers.”

While newly arriving households require housing, that can quickly become a negative should the state economy worsen and jobs be lost. Adults that migrate to Texas can just as quickly depart.

Between 2005 and 2008, more than 200,000 Californians moved to Texas. Whether they stay depends on how well the state’s economy holds up.

Texas’ population also is younger than the nation as a whole. At 33.2 years, the median age gives Texas the second youngest population. Through 2040, Texans 65 and older will increase three times as fast as the overall state population. Flattened incomes and falling retirement savings will lessen the demand for second homes. Many boomers age 55 to 64 will continue to work, thus reducing the number of future relocations.

“Americans born between 1977 and 1997, known as ‘Generation Y,’ are showing less interest in homeownership,” said Hunt. “Whether because of personal preference, economic reasons or both, they are expected to be renters for a longer time.”

Other demographic factors will determine the future of Texas real estate. Texas is rapidly becoming more urban, especially east of I-35.

“By 2030, the average density of the five major Metropolitan Statistical Areas is forecast to more than double,” said Maler. “Dallas-Fort Worth is expected to have the highest population density.”

Higher density means more multifamily dwellings, both for rent and for sale.

Sometime between 2028 and 2040, Hispanics will outnumber Anglos in Texas, according to the Texas State Data Center. Studies show that heads of foreign-born households currently are less likely to own a home.

“Home purchases by new Hispanic immigrants will continue to be limited because of income, education and language constraints,” said Maler. “However, as future generations become better educated, more skilled and more proficient in English, exceptional growth in the Texas Hispanic population could result in increased home purchases in the years ahead.”

For more information, read “The Changing Face of Texas” in the July issue of Tierra Grande magazine, the flagship periodical of the Real Estate Center. It is online at http://recenter.tamu.edu/pdf/1938.pdf.

The Crossland Family has Super-Down-Sized from our nice, big, 2-year old custom home in Oak Hill to a crappy old 1970s house in Westlake. Now Me, Sylvia and our two teenagers are “crammed in” to an 1859 sqft rancher compared to the former 3316 sqft home, and 3701 sqft in the home prior to that.

This new house has a bad sewer line (and slow flushing commodes), aluminum wiring, former slab repairs, cracked sidewalk leading to the front door, termites, small secondary bedrooms, a giant dead tree in back, leaking sprinkler system, old worn out carpet (layered on top, believe it or not, of an older worn out carpet underneath), and a punch list of needed repairs and fix-up things at least 20 items long and growing daily. I’ve had a parade of vendors in and out of the house since we moved in two weeks ago and more on the way. This place was a rental home for 20+ years. I couldn’t move a renter into a house like this without hearing an earful of complaints, but we did it ourselves. And we couldn’t be happier with our new home. We absolutely love it.

Why are we so elated about our move into this dump? Location, first and foremost. More on that in a minute. But, also, we’ve grown weary of maintaining nice big houses on acreage and the accompanying expenses of that lifestyle. I mowed my own lawn 2 days ago for the first time since 1999 after me and my new neighbor spent an hour working on the old mower, taking apart and cleaning the carburetor, and getting it running.

I don’t need lawn service once a week anymore. We don’t need maids to come keep everything clean and shiny every 2 weeks. We don’t need a professional window washer to clean gigantic picture windows twice a year. This new house has 1 A/C filter to keep changed, the old one had 5 filters and I needed a 10ft step ladder to get to them all because of the nice high ceilings we had. The old house had high-end fussy appliances that were expensive to repair. This house has Plain Jane appliances that work surprisingly well, especially the black dishwasher that doesn’t match our white gas range and stainless fridge, all tucked nicely underneath a fabulously 70s seven foot two inch kitchen ceiling with yellowing plastic covers over the fluorescent lights. The new house has 32 light bulbs, the old house had over 100 light bulbs. You get the point. To sum up the lifestyle change in one word, I’d have say I feel “unburdened“.

But our primary motivation in leaving our beloved Oak Hill was location, getting closer back in to the core of Austin and living in a home from which we can walk places and better enjoy the Austin lifestyle.

Our oldest daughter will be able to walk to Westlake High for her senior year instead of commuting from Oak Hill as we have for three years. She has friends in the neighborhood. Our younger will have 4 years of walking to Westlake High, though we will have one year of backward commute to the Waldorf School in Oak hill so she can finish 8th grade there. One more year of fighting traffic at the dreaded “Y” in Oak Hill, but we’ve already lined up carpooling.

But now we can walk to not only the school but any number of establishments in less than 15 minutes, including Trianon Coffee house, where I often meet people to sign papers, Thundercloud Subs, a Yogurt shop, Chipotle, Kinkos/FedEx, Redbox at McDonalds, the post office, the library, and much more. We’ve already been taking advantage of this walkability. And if that’s not good enough, the bus stop for the Number 30 Barton Creek Mall/Downtown is a 6 minute walk from my new front door.

Last Saturday, Sylvia and the girls headed to Zilker Park (5 minute drive) at 4PM and laid out a blanket to stake out a spot for the Zilker Hillside Theater free showing of Annie at 8:30PM. Then they swam in Barton Springs Pool and hung out with friends (while I worked). I planned to meet them there later. The way this worked before is I would drive there and we’d end up with two cars to drive home afterward. This time, from the new house, I hopped the #30 bus at Walsh Tarlton for $1 and made it from my front door to our blanket, stage center, in exactly 23 minutes, including walk time through Zilker from the drop off at Barton Springs Rd. Awesome. Easy. Practical. And only one vehicle to bring home.

This #30 bus will get us into the heart of 78704 along Barton Springs Rd. and up into downtown in minutes. Dinner at Roaring Fork on Congress? No parking hassles. SXSW Festival? No parking hassles. ACL Fest? I’ll be the one getting off the bus at the front gate. Concert at Auditorium Shores, Plays at Zach Scott Theater, lunch anywhere on Barton Springs or downtown, SoCo, Casa De Luz, or a walk around Town Lake – all a quick, easy bus ride while the car and its operating expenses and parking hassles stays home.

We’ll be empty-nesters in 5 years and this home is the perfect size and location for Sylvia and I as we head into retirement and hopefully spend more time having fun and traveling once the kids are on their own. We don’t want to be trying to take care of a big empty house. This one is all we need, and yes, we will fix it up and make it nicer eventually, and we got such a great deal that the condition items don’t matter.

Finally, the thing that’s really hard to quantify or explain is simply the feel, the vibe of being close to people and things again. Feeling like an Austinite living in Austin instead of just outside it. The walk-ability and the freedom of not feeling 100% dependent on a 15+ minute drive to go places and do things. The closer interaction with neighbors instead of a shout hello and a wave from 300 feet away across our professionally manicured 1+ lawns.

The small things too, like true single-stream recycling service, and the bus service. No HOA fees, but city enforcement. We can vote again for local governance instead of being stuck out in the County with no voice in city elections.

And, even though we do still drive most places because of the nature of our work, these seem like short quick jaunts instead of tiring journeys through the dreaded Y in Oak Hill. Coming South on Mopac or 360 and exiting Bee Cave is a lot different than continuing on down through the Y in Oak Hill, especially between 4PM-6PM. The back way to Rudy’s BBQ on 360 is 4 minutes from my house, with no freeways. I’m in heaven.

So, as we’ve encouraged our buyers over the years to buy as close in to Austin as you can afford, because we believe there is value in proximity, we are now once again finally enjoying the benefits of that ourselves. And it’s really great to be doing so.

As the seller of a home, do you have to read the buyer’s inspection report if the buyer presents it to you? No, you don’t.

And if you are a seller represented by the Crossland Team, we advise that you don’t look at or read a buyer’s inspection report because we don’t want you getting stuck with someone else’s inspection report, produced by an inspector you don’t know and didn’t hire, and which you’ll then have to staple to the back of your Seller’s Disclosure notice if that buyer flakes out and terminates the deal. Then all your future prospective buyers will read that report, for better or worse, and it’s best to not let that happen.

Not all Realtors subscribe to this “I don’t want to see it” philosophy. We sometimes catch flak for this from buyer agents who want to leverage inspection report items to gain price reductions during inspection periods, and they sometimes become angry when we inform them that our seller doesn’t need to see or want to see buyer’s inspection report.

Why not just look at the report?

Section 7 of the commonly used TAR Seller’s Disclosure Notice asks sellers:

Within the last 4 years, have you (Seller) received any written inspection reports from persons who regularly provide inspections and who are either licensed inspectors or otherwise permitted by law to perform inspections? lf yes, attach copies and complete the following:

Most Seller’s Disclosures say “No” on Section 7. Once you receive your buyer’s inspection report, and if the deal craters, you have to change section 7 to “Yes” and attach the report you received, whether you agree with the findings or not, and no matter what mis-characterizations and false assumptions the report might contain. This opens a huge can of worms and can affect the answers you must provide in other parts of the Seller Disclosure.

Additionally, you are already under contract for an agreed price, as-is, and there is nothing in your Texas sales contract that requires you to make repairs (unless specifically written in the initial contract) or look at buyer’s inspection. Buyer has an Option Period, usually 7 to 10 days, to examine the property and conduct whatever other due diligence buyer deems appropriate. During this Option Period, the ball is entirely in the buyer’s court. If the buyer does not terminate prior to the end of the Option Period, the deal continues unchanged.

In almost every deal, however, buyers come back and seek a price adjustment based on conditions that were not factored into the agreed contract price. These range from small and reasonable adjustments to hysterical and ridiculous demands. It is the manner and style in which these adjustments are calculated, communicated and resolved that reveal huge differences in real estate agents and how we advise clients and conduct negotiations. Is there a “right” way and a “wrong” way to go about this? I believe there is.

First of all, a buyer purchasing an older 1960s or 1970s home should have already been prepped and warned by the buyer agent that most of the inspection items are going to be flagged as “out of code” and/or “Deficient”. Especially the electrical and plumbing. Expecting otherwise is like hoping your 80 year old grandma would, upon examination, be found to be in the same physical condition as your 21 year old son. That ain’t gonna happen. Thus, the “ugly” inspection report ought to come as no surprise to the properly informed buyer and her agent. It’s always unfortunate when buyers who think they want an older home closer in simply can’t survive the type of inspection reports those homes produce because they are unable or unwilling to view the inspection report in its proper context.

What is the best procedure to address needed repairs?

After inspection, good agents normally contact the listing agent and ask if they have a preference in how repairs are requested. Some agents/sellers actually do ask to see the entire report, and when on the buyer side, we gladly provide it because we think it strengthens our negotiation position.

When I’m asked as a listing agent, I say “just boil your justifiable repair items down to a dollar amount and send over a signed Amendment with the amount in para 12(a)1b (buyer closing costs paid by seller). If we want more detail, we’ll ask for it after we see your amount, but all we need to start with is the amendment without explanation or details”.

We want dollar amounts instead of repair requests because a) lenders don’t like to see repair language in contracts and b) dollar amounts are not subject to opinion or debate as to whether they are completed properly or not. If you agree to $800 in closing costs that’s a whole lot different that trying to agree to “seller to repair and paint rotted wood at rear trim”, or something of that nature. One or two professional trade repairs can be ok, such as “seller to have licensed roofer repair flashing at chimney”. But money is always the easiest and surest approach for both parties if the amount can be agreed upon.

Once I have the Amendment and the amount requested, I’ll call the buyer’s agent and ask for a general overview of what the amount is intended to cure and how it was calculated, in general, so I can communicate that information to the seller. If it’s a small, reasonable amount that the seller is willing to give back, perhaps to replace a water heater we already know is old, or to fix an actual roof leak that we didn’t know about before, we have the seller sign the Amendment and we’re done. Or we’ll counter with a smaller amount, sometimes zero.

If it’s a large amount being requested, we’ll find out more about it, but never do we venture outside the scope of what comprises the specific amount being requested. Almost never do we request or need to see the actual inspection report, unless the seller desires to do so. I’m not saying this never happens, but it should be carefully considered first.

Occasionally an agent, unannounced and with no prior communication about it, sends over the entire inspection report, a letter from the buyer, and/or sometimes a bunch of bids from various vendors to fix things the buyer thinks ought to be fixed for free. This is usually via email attachment. We don’t open the attachments or look at them, but instead respond to the agent saying (I’m paraphrasing for brevity) “we only want to see any proposed Amendment you might be offering, nothing else. We have not and will not look at or review the inspection report or other documents sent. The attachments are being deleted and not viewed”.

This is when some agents get pretty bent out of shape and want to argue, and want to cram the inspection report down the seller’s throat. But there is no upside for our seller to see that information, at all. All we want to know is “does the buyer still want the house and, if so, do you have a proposed Amendment seeking a price adjustment or a specific simple repair that can be performed in one trip by a licensed tradesman?”

Incredibly, some agents and their buyers can’t articulate what they want. I’ve heard more than once a vague sort of response such as “we just want your seller to review the inspection report and tell us what he’s willing to do”. Uh, that’s not how it works. Shame on agents who can’t do better than that, or can’t council buyers into a more effective approach. That’s Realtor/buyer negotiation at its worst. When pressed in that way, I simply tell the agent that the seller is happy to move forward “as is” and that we think the contract price already reflects the property condition and that the buyer is getting a fair deal.

Does the seller have an obligation to offer to make repairs? No. Does the seller have to read letters, look at reports and/or bids? No. Does the seller have to take into consideration the feelings, fears and worries of a buyer? No. Does the seller have a duty to try to “understand where the buyer is coming from?” No.

The seller simply agreed to sell the house, as is, at an agreed price. If issues were encountered during inspection, it won’t come as a surprise to the seller, because every home inspection reveals something, but there is no unwritten agreement that seller will fix anything at all.

It’s the responsibility of the buyer to determine whether or not the property condition is acceptable and, if not, make an offer to change the agreement or terminate the contract. The seller often does want to learn about and know what the buyer’s concerns are, to the degree necessary to negotiate, and we will seek to find out whatever we think we need to know on the listing side, and we will try to make the deal work. But we do so mostly in general terms unless we decide to dive into the buyer’s issues in greater detail.

It’s a poor listing agent, in my opinion, who allows his seller to come into possession of unknown documentation which could harm the sales effort if that buyer decides to bail out and leave the seller holding a potentially egregious and harsh inspection report prepared by an unknown inspector, and/or bloated bids from unknown vendors.

Recently another agent said to me, in trying to force an inspection upon us, “if it’s a licensed Texas Inspector, it’s a valid report and you can’t ignore it”. Yes we can ignore it. It’s your buyer’s inspection report, not ours. And, like Realtors, the quality and experience of inspectors varies greatly, so just because someone is licensed doesn’t mean they know what they’re doing.

I once saw a 70 page inspection report conducted by an inspector who filled every item with scary boilerplate warnings, whether the item was flagged as “Deficient” or not. Why should that inspector’s lazy boilerplate garbage be allowed to become part of my seller’s disclosure to future prospective buyers?

Some inspection reports are intended first and foremost to reduce the liability of the inspector by over-stating every condition and recommending for all major component items that the home be inspected by a licensed Plumber (or Electrician, or HVAC person, or Roofer, etc). As a seller, once you agree to accept and receive such a report, everything in it becomes your “knowledge”of the home, whether it’s the inspector’s guesswork or not, and you have to pass it on to all future prospective buyers whether it’s a garbage report or not.

We don’t think you should subject yourself to this sort of uncontrolled variable. For the same reason you shouldn’t click on unknown internet links because you don’t know the content you are agreeing to receive until the damage is done. As a seller, you shouldn’t allow someone to simply dump “mystery meat” into your sales effort stew. You’re the chef, you decide what ingredients go into your sales effort, and whether you want your Seller Disclosure to include an inspection report, not some random buyer who can flake out and leave you holding his inspection report.

It’s best to simply work with buyers in a more controlled, methodical fashion when negotiating repair issues. You and your listing agent should control the process and flow of information, not the buyer. Make sure you don’t accept or come into possession of written inspection reports that were prepared for the benefit of a buyer instead of you.

Take a look at this chart showing the number of homes that go under contract, or “Pending”, in Austin each month over the past several years. The green line is 2010. I could almost stop writing at this point and just let the chart tell the entire story. But have a careful look at the Austin real estate market behavior for the past several years, and then see what our government caused to happen in April and May with the $8K tax credit.

The writing was on the wall last month when I wrote about the Tax Credit Effect on the Austin Real Estate Market. We had a record number of homes go Pending in April, and May was looking pretty slow, and that didn’t change. So we end up with a record high followed by a record low month in terms of number of homes going under contract.

And in June, the hangover persists. As we head into the last weekend of what is historically the second busiest month of the year, the Austin real estate market is getting ready to lay another rotten egg. Thanks Tax Credit, for sucking the life out of the market, even with interest rates yesterday at 50 YEAR LOWS!. At present, we have about 1250 homes that have gone Pending in June, so even if we have a brisk next 6 days, you can look at the chart and see that June will remain substantially below the expected level under normal conditions.

What does this look like out in the field?

Well, it’s the old Tale of Two Markets. Some homes, not many, but some, seem to have had the proverbial magic faerie dust sprinkled on them and they are selling just fine. Sellers of these homes should thank God for picky buyers who get emotionally attached to one home. Other listings seem stranded, stagnant and dead in the water, even after huge price drops.  Of the homes that went Pending in May and closed, the median days on market was 43, meaning half of all sold homes sold in 43 days or less. Not many sellers would complain about that. But the Sold to List Price (Original List Price) ratio was 93%, indicating bigger than normal price drops averaging over 7%.

So where do we go from here?

It’s hard to say. The slow summer was something we assumed would happen because of the tax credit, but I’m surprised at the severity of the high/low swing. The other counter-intuitive thing that might happen though, is a busier Fall. We can only guess at this, but our Austin real estate market has been moving in off-cycle ways for over a year now, making it hard to predict trends. If that happens, the green line on the chart above may actually cross over the other three and finish Oct-Dec higher than preceeding years. This may be wishful thinking on my part, but I still thinks it’s a distinct possibility if jobs and the economy pick up by September in Austin, and interest rates start rising.

Sylvia and I do receive gobs of “Huge Price Reduction” emails from other listing agents daily though. One yesterday dropped from the high $600Ks to below $500K. Curious, I ran a CMA on the property and, based on sold comps, the high $600Ks didn’t seem over-priced at all. So pricing has become very difficult for sellers and listing agents. The sold comps mean less than they normally do and we instead have to look at absorption rates and competing home prices.

We thought interest rates would have started ticking up by now (which, oddly, will increase buyer activity when it does happen). The trouble in Greece and Europe actually caused our interest rates to drop instead, and now it seems rates could stay below 5% for the rest of they year, which wasn’t supposed to happen. Meanwhile, tighter lending rules, caused by government incompetence (like “accidentally” eliminating owner financing for non-owner occupants, and letting FEMA flood insurance expire such that no flood insurance can be written at all – stalling or killing the sales of homes for which flood insurance is required – including one of our listings), keep eliminating more and more quality buyers due to the over-correction of lending standards and stupid new rules. We have no investors to speak of because even quality borrowers are having trouble with the new ratio requirements. And many otherwise qualified buyers who would move up are instead stifled by these onerous new underwriting rules. Again, our government making things worse than it would be if it did nothing.

Bottom line:
Sellers and listing agents must increase the margin of error accounted for when pricing homes. My margin of error use to be 0%-3% on listing/sold price. Three years ago if I told you I could sell your home for $295K, the worst that might happen is a sale for $285K. Of that, I would be very confident.

Today, because things are so sluggish and hard to read, the margin of error is 0%-12%. Yes, 12%.That’s embarrassing. If market data indicates your home should sell for $295K, it might very well do so, but it would astound none of us if it ended up only fetching $260K. For sellers, that sucks. For smart buyers, that rocks.

I just finished adding one of our new listings to the Austin MLS. Years ago, this took about 15 minutes. There was far less data included and only 8 photos with no comment space for photos, no pdf attachments, and far less space to type the general description of the property.Today, a nearly overwhelming amount of data, photos and attachments must be included with a properly entered MLS listing, and it takes a while to enter it all in.

How long do you suppose it takes today to enter a real estate sales listing into the Austin MLS, from start to finish, sitting down at the computer with photos, files and info all ready to go? This includes 25 photos to upload and type in comments for, several pdf attachments, 512 characters of description (both agent-only and another 512 for the public sites), and (I haven’t actually counted) what must be well over 100 fields and data-points, including driving instructions to find the property right down to trivial data such as whether the 2-car garage has one door or two and which compass direction the property faces.

The one I just completed took me about 70 minutes. I started at 7:42AM and completed it at 8:50. It’s best to do it late night or early morning to reduce interruptions. Sometimes it can take as much as 2 hours, or longer if interruptions occur, or sometimes we have to save as “incomplete” and finish later before posting live.

But it’s important to get it done, start to finish because not all of the listing feeds update properly. This means that if I add a half dozen photos to start with and decide to finish the rest later, the initial data feed that sends listings to the vast array of public facing websites will send out an incomplete set of photos.

Some photos will update later, but others will not, and those sites will retain only the initial set of pics. So, in the case of adding a new listing, first impressions are literally the only impression in many instances. So it’s important that your listing agent knows how to gather everything needed ahead of time, including all 25 of the best photos to be used, virtual tour links, and all of the data points needed so that every photo and every field on your listing is correct right out of the gate.

An impatient seller might ask, “what’s the big deal. Can’t we hurry up and get the listing in this weekend and add the better photos later?

Not a good idea. Remember that many buyers also have “search portals” set up by their agents which notify them daily, or sometime instantly, of new listings that match their auto-search. When the buyer clicks that listing link from inside her email inbox, you want the buyer to see ALL the photos, not a temporary shot of the front of the house with a car in the driveway and a trashcan sitting at the curb. This might be the one and only look they have of the home, at which time they dismiss it as not interesting enough.

Sad but true. Buyers are often ADD with short attention spans, and they give undeserved weight to the initial perceptions created by the photos. Your listing better capture their attention immediate if you want them to look further and call their agent to schedule a showing instead of getting back on Facebook or sending their next tweet.

So how long does it take, all tasks included, to actually list a home, including appointments, phone calls, CMA time, staging, scheduling virtual tours, downloading via ftp the photos and tour, gathering the data and making sure it’s right, chasing down the seller for loose ends, namely missing disclosures, the survey, survey affidavit, HOA info, utility company info, drives to the property, walk-throughs, etc?

I’m just guessing since I’ve never actually tracked it, but I’d say by the time a listing goes live in the Austin MLS, we probably have 8-12 hours of time invested, and about $500 in professional photos and staging, for a typical home.

I once spent about 5 months helping a seller prep the home, including hauling multiple loads in my truck to Good Will, scheduling repair vendors, landscapers, etc. Other listings are fairly easy and quick and are almost ready to go as-is, just because the seller takes great care of the home, keeps it clean, and has nice furniture. Those are nice but rare. In the end it all averages out.

As someone who’s bought and sold a bunch of rentals, and helped other investors buy, sell and manage investment property in Austin for a number of years, I’m about to ask a question that might seem counter to my professional mission of being in service to real estate investors.

Is rental property investing in Austin still a good way to build long term wealth?

My answer, for a lot of people, is “probably not”.

Let me rephrase the question.

Is rental property investing in Austin a good way to lose money and create financial stress in one’s life?

Absolutely. More so than ever.

So, am I saying you shouldn’t invest in real estate in Austin, or elsewhere? No, I think everyone should consider doing so. But I do think, after careful consideration, a much higher percentage of people should decide against it than would have been the case 15 years ago. The opportunity for mistakes, bad decisions and cash flow disruption for the real estate investor today is much greater than in past years.

In other words, your margin of error is very thin. You better know what you’re doing, or have a good adviser. Success is harder to achieve than if you started in the 1980s or 1990s simply because today’s ratios are thinner. The financial and psychological profile of a good candidate real estate investor today has a much higher bar to clear than in years past. Let’s take a look at why that is.

Positive Cash Flow Harder to Achieve
The very first rental property Sylvia and I bought in Austin was a 959 sqft, 2 bedroom house on Avenue G in Hyde Park. We paid $58K. Then we immediately spent $7K to redo the kitchen and bath and rented it out for $825/mo, which provided $300/mo positive cash flow. This was in 1994.

18 months later we sold that home for $95K. We took the equity proceeds and bought another fixer-upper house for $60K in South Austin 78704, which we completely rehabbed and sold 4 months later for $129K.

We then took the proceeds from that sale and bought another home in South Austin 78745, and so on. We continued to “ladder up” as years passed, buying, selling, keeping homes. Making some mistakes but hitting more home runs than strikeouts. Such were the opportunities. Success was not dependent on bubble appreciation or low probability luck.

In 1999 I sold one of our investment properties in South Austin 78745, which I like to use as an example when discussing the erosion of our rent/value ratios over the past decade. At that time, the home was rented for $950/mo and it sold for $92,500.That means an investor could buy a home like that with 20% down payment on a 15 year loan at 6.5% interest and, because taxes and insurance were lower relative to rent value back then, have a total PITI payment of about $850/mo. on a house that rents for $950/mo.

That same 1400 sqft brick home in Cherry Creek would sell today for about $170K but would only rent for about $1195. In 1999, it took about 2.5 month’s rent to pay the annual taxes and insurance. Today it would take 3.8 month’s rent. That’s over a month’s rent each year, down the drain in higher taxes/insurance.

Appreciation Potential
In the old days, we didn’t worry so much about appreciation potential. It wasn’t ignored, but it wasn’t a “must have” to make the numbers work. After all, the property was paying for itself and would be free and clear in 15 years. Solid value appreciation was just a bonus, sometimes even a windfall, but never expected or taken for granted.

Today, if you don’t carefully consider the long-term viability and demand of the rental property you purchase, you will be failing to properly factor in appreciation potential. You have to ask yourself if the property is one that has a good chance of enjoying increasing demand because of location, and thus greater value appreciation than less desirable areas.

Failure to ask this question is the mistake so many dummy investors made during the bubble years. These wannabe investors and seminar buyers with low down payments and the easy-to-obtain loans assumed, for no good reason, that the price of all real estate would rise, no matter what and no matter where.

In a strange way, these “appreciation” buyers were partially right in desiring appreciation, but were unrealistic in their underlying analysis, primary location selection. If you are not willing to pick a quality location, and sacrifice a bit on cash flow, then all your extra cash flow could easily be lost in value slippage as has happened to the investors who bought further outside Austin from 2005-2007.

Is it a good idea to bet on appreciation only? No, obviously not. But you can’t ignore the fact that the tighter ratio numbers of today require some value appreciation to make things work out over time. That means sticking to quality product in good locations.

Repair Costs
In the 1990s, we had an abundance of $25-$35 hr vendors who could fix just about anything in a home. Not anymore. We paid $350 total to swap out a 40 gallon water heater in 1999, today it’s $750. Stoves and dishwashers had simple parts that were cheap to fix or replace, today everything has an expensive computer chip and/or control card. Older appliances and HVAC systems lasted 10+ years, sometimes 20+ years. Today’s stuff often breaks down during the first year, especially cheap foreign made A/C coils that develop freon leaks. Everything today costs at least twice as much to repair as it did a decade ago.

What this means to you as an investor, is that the number and type of repair events that can wipe out an entire month of rent, or more, is substantially greater than in years past. A good analogy would be the comparison between rising health care costs and wages. Wages have not kept up and we all pay a greater percentage of our income toward health insurance and medical costs than a decade ago. So too does the landlord pay a greater percentage of rental income toward repairs today than was the case a decade ago.

Ten or fifteen years ago, our repair costs across an entire portfolio of management properties ran at about 8% of annual rents, including major replacements such as roofs and HVAC systems. Today it’s about 12%. In 1999, it cost 2 month’s rent to replace a roof ($2,000). Today it would cost 5.4 month’s rent to replace the roof ($6500) in my Cherry Creek example above. Luckily, roof replacements are few and far between, and often covered by insurance due to hail damage, but still.

Conclusion
Despite all this, I still invest in real estate and I’m still a buyer. The S&P 500 ended 2009 at about the same point it started in the year 2000, so at least in that decade, real estate was the winner for those of us who didn’t get sucked into the bubble mentality and stuck with basic decision-making rules. But real estate investing is not for everyone, and it makes sense for far fewer people today than it did in the past. Mainly because the opportunity to experience financial stress as a result of your rental property ownership is greater than before. People without sufficient reserves are the most vulnerable and should simply stay out.

Is there a safe way to get started?

The best way, I think, for someone to start in real estate investing is to convert your existing home into a rental when you move up, provided it’s well located and has the attributes of a good rental property, which means it’s not too big or small and will attract quality tenants.

By converting your existing home, your financing is already in place, you know the home and its location well already, the new owner-occupied loan you obtain for your next house will be much easier to obtain than a new investment loan, and if you’ve lived in the property at least 2 years, you have a 3 year window during which you can still sell with zero capital gains tax if it doesn’t work out for you. Then start saving for your third home and just keep leaving a trail of accumulated rental homes behind as you go.

This will be even more effective for those able to improve a home in disrepair while living in it, thus increasing its value (appreciation) more than whatever the natural appreciation rate might be.

And there are a number of other strategies for those with higher risk tolerance, but for most, starting slow and having a long term strategy and sufficient financial staying power is going to be key to success. If you don’t have at least 6 month’s rent set back to cover turnovers or unexpected repair events, you are in a weak position as a real estate investor, and your lack of funds can start a cascading series of bad decisions that eventually drag you down.

Play it safe, be smart, don’t make wild optimistic assumptions. Put at least 20% down, more if you can. Always assume the worst and ask if you can handle that. If not, don’t do it.

The $8,000 buyer tax credit ended April 30, 2010. Take a look at the following graph to see the effect the tax credit had on buyer activity in Austin TX.  This shows Pending activity for Austin MLS listings going back to Jan 2005 through April 2010. The green line is 2010. The previous years of 2007, 2008, 2009 are represented by the other colored lines.

I used Pending listings because a lot of the April Pending sales haven’t closed yet, but anything that qualified for the tax credit would have to be Pending by April 30th, so this gives us a sneak peek at what the sales data will look like for May closed sales.

A couple of interesting things to note here. I went back to 2007 because that was the peak year for Austin. As you can see on the chart, April Pending listings exceeded the peak year of 2007 for April. I suspect we’ve never experienced an April in Austin where almost 3,000 homes received accepted offers.What does this mean for the future?

Looking forward, and seeing the trend lines of previous years, I think it’s safe to say that when I update this chart in June, to include all of the listings that go to Pending status in May, we’re going to see the green line dip almost all the way back down somewhere between the 1200-1600 line. That’s going to look quite interesting visually. We’re more than halfway through the month and there is only 656 Pendings so far for May. Unless the second part of May experiences a hugh uptick in activity, we will in fact see the market swinging from one extreme to the other and the green line above will take a breathtaking plunge.

Then the question will be whether or not the May plunge will represent a temporary market hangover and will eventually rejoin the other trend lines, or at least somewhere close, or if we have in fact stolen so many future buyers and crammed them into the first 4 months of 2010 that the trend line will remain below the others for the remainder of the year. If the latter happens, it won’t be good news for Austin sellers and we will see continued price slippage.

Meanwhile, because of economic turmoil in Europe, caused by Greece’s problems, and the subsequent “flight to safety” by investors to safe U.S. fixed income products, interest rates have not taken the expected upturn yet and in fact remain at historic lows. I just locked 4.75% interest on a property Sylvia and I are purchasing. I doubt I’ll see that again for a 30 year fixed mortgage in my lifetime.

Thus, if you’re a buyer who missed the $8K tax credit, the good news is you’re going to realize a much greater savings than that in the lifetime interest paid on your sub-5% loan, if you get in and buy a home while interest rates are still low and sellers are seeing fewer showings.

Sellers, it’s going to require some patience to see if June/July summer selling months shake off the May hangover and snap back into normal behavior. It’s still a guessing game, but I just encouraged an investor thinking of selling to hold off another year because I’m much more optimistic about summer 2011 than I am summer 2010.

But won’t rising interest rates hold down prices in 2011?
Maybe, but I think that will be offset by improving job growth and the continued migration of job seekers to Austin from areas that may take years to recover economically.

And who’s going to say it’s necessarily a bad deal for someone to buy a house in Austin in 2011 at the 2007 price and a 6% interest rate? Come on. Really.

I just received my property tax appraisals from Travis Country Appraisal District (TCAD)  and Williamson County Appraisal District (WCAD) for 2010. Doesn’t look like I’ll need to protest any property values this year. Some properties are borderline high, but not worth the time and effort to dispute because a) they are close enough, within a percent or two of my estimate, and b) some are low enough to offset the overage on the others, in my mind, and c) I still traumatized by my exposure to the utterly moronic and incompetent panel of idiots at my formal tax protest hearing last year. I need another year of recovery before I subject myself to that type of abuse again.

But as a home owner with only one property, even if your value is only a little bit high, it may be worth the effort to keep the value down so that the basis for future increases remains lower. And remember, if it’s your homestead, the value upon which you are taxed can’t rise more than 10% per year. This year, many of you will see an actual decrease in appraised value.

Each year Sylvia and I perform an increasing number of free comparative market analysis (CMA) for property owners seeking value guidance, or evidence to use in a property tax protest. That deal still stands. We did almost 100 of them last year, which actually benefits us as much as you because we get to really hone our CMA skills and see what home values are doing in many different parts of Austin. And many of you have turned into clients, which we really appreciate.

And here is a list of useful links to help you self-educate about the tax appraisal protest process at TCAD or WCAD in case you do decide to seek a reduction in appraised value.

Travis County Appraisal District Property Search
This is the County website where you can look up your property address and see what your 2010 appraised value is.For Williamson County Appraisal District, click here.

How to Protest Your Property Value at Travis County Appraisal District
This is the article I wrote a few years ago, in 2007, about how to protest your appraised property value at Travis County. I need to update it a bit now that TCAD allows an online protest for certain property owners. But the article still provides a complete overview of the basic factors you should consider before protesting, and the steps to follow to increase your chances of success.

Free Comparative Market Analysis (CMA) for your Austin Area Home
This is the request form I set up after the above article started generating so many emails asking for help. Just complete the info and we’ll run a market analysis of your home and provide you with the results, including the comparable sales you would use as evidence at your hearing.

Austin Value Map – Find your Austin home value in 10 seconds
If your home is located in a homogeneous area of similar homes, and you’d like a quick automated value check, I set up this free tool to provide a fast, free, easy value check. It’s not 100% accurate, so don’t rely on this tool alone, but it will provide you with an estimated value and show your nearby homes that have sold and that are for sale. The algorithm uses actual MLS sold data as well as other factors, so it is, in my opinion, far superior to Zillow or other online valuation tools. To see a discussion of this tool and feedback from those who have tested it, check out this blog article about it.

Finally, below are links to some pretty good articles in this morning’s Austin Statesman about tax appraisal process and the new online protest that will be offered to some.

Travis launches online appraisal protests for some homeowners
How Your Home is Taxed
Williamson appraiser to use last-minute sales prices

Feel free to add your comments or ask questions.

With the April 30th expiration of the home buyer tax credit, it’s time for buyers, Austin sellers and Austin Realtors to figure out what happens next. Austin Sellers who didn’t get offers might wonder, “are the buyers all gone now?” Austin Buyers who didn’t get their act together and claim the tax credit might wonder, “did I miss the boat?” Realtors in Austin are wondering if business might dry up as the market takes a breather while the hangover wears off. Here’s what I think.

Sellers
Many Austin Sellers in the sub-$250K price ranges placed homes on the market earlier this year, sooner than they otherwise would have, hoping of course to catch the wave of tax credit buyers. This is something we encouraged, and rightly so, as many of these homes did in fact sell. These “timing opportunist” sellers include both motivated sellers and fair weather “let’s see what happens” sellers.

The latter group of sellers with unsold homes will start removing homes from the market fairly quickly as they’re already experiencing the early stages of  “seller fatigue”, and might now feel discouraged. They don’t really have to sell anyway, but would have if the right offer had come along. It just didn’t happen. If I’m right about this, the May real estate market stats for Austin will show a spike in Expired/Withdrawn listings.

The former group, those who still really need to or want to sell, will remain on the market, perhaps with price adjustments, but not necessarily. They may have less inventory to compete against as other withdraw, and that could hold prices up. It would be prudent for those sellers to remain patient and see what happens with showing traffic at least through June when the market would normally be in full swing.

Buyers
Not every buyer is a first timer, and not every first timer was motivated to enter the fray early just to capture a tax rebate. Thus, as the normal, traditional selling season of May-August begins, it would be a mistake to think that the window has somehow been closed on good deals just because the tax credit has ended.

Interest rates remain at about 5%, which ought to be motivation enough in normal times not only for first time buyers but for move-up buyers as well. Fewer buyers will presumably be looking in the near term as, even with the tax credit motivation, some were unable to find a suitable home and will now stop looking entirely. So remaining buyers may have few buyers to compete against.

Also, I expect further price slippage in Austin this year before a sustained price increase cycle begins next year. It may be that those buyers who waited until this summer to buy might find fatigued and motivated sellers with whom to cut a deal. On the other hand, Austin sellers have remained surprisingly unwilling to capitulate en masse, as evidenced by the large number who simply withdraw from the market after saying “no thanks” to a string of lowball offers.

Other Factors
The tax credit was quite lengthy. The longer a government stimulus effort runs, the less “hangover” impact we see when it ends. The tax credit, notwithstanding the final rush to the finish line, had really begun petering out for the most part, and home prices in Austin have fallen every month (from the month before) this year even as the number of sales increased.

Timing is good. Though I griped on this blog about the stupidity of creating artificial off-season, off-cycle buyer demand, the expiration of the tax credit is timed perfectly with the beginning of the normal selling season. This should lessen the impact of the expiration of the tax credit.

Interest rates remain at historic lows. But rates will start to rise soon, if not immediately. As mentioned above, a 5% interest rate is an unbelievably extraordinary interest rate which, in and of itself, would normally excite buyers (both new and move-up) and get them out looking at homes. People under the age of 30 don’t know that, historically, 7% to 8% is a decent mortgage interest rate. Austin buyers have become so desensitized to a 5% rate that it is not, at present, serving as the motivational catalyst that it should. The government actions that have kept interest rates artificially low have also ended, and there is universal agreement that rates are on the way up. Once this sets in, and buyers begin to fear losing the opportunity for a rate in the fives, it will motivate buyers to get off the fence. By this time next year, rates should be in to 6%+ range.

Buyer Sentiment is improving. As national economic and real estate news heads toward a tipping point of net positive, this affects the mood of buyers. People are feeling that better times are closer ahead than before. Though odds of a double-dip fall in national home prices and the economy are high enough to postpone celebration, Austin will turn the corner this year and start adding jobs at an increasing rate, which will drive our real estate values higher by next year at the latest, and possibly sooner if interest rates rise faster and inventory shrinks quicker than expected.

Austin has a shortage of developed lots. Builders in Austin have already kicked up the home starts in anticipation of improved buyer demand moving forward. The pull back 3 years ago was such that we are left now with a shortage of developed lots in the pipeline. This, along with increasing materials costs will drive prices up new homes prices eventually, and resale home prices will follow. As with interest rates, the typical consumer responds better to fear of missing the train than they do the realization that things have already bottomed out and are really great right now. So when values start looking like they are entering a sustained climb, along with interest rate increases, this will generate buyer activity.

Those are my thoughts, somewhat rambling, somewhat contradictory. Still a lot of guesswork and unresolved factors to play out.

The Austin real estate market for March 2010 saw a not surprising 22% increase in the number of sales compared to the same month a year ago. Average sold price was up 2.22%, median sold was slightly down at -0.66%. Before we call that “good news”, it would help to know that March 2009 was the lowest point in average/median sales prices in the past 2+ years. March 2010 average sales price is still lower than March 2008, two years ago, so average values are still treading water at best.

The Not Solds (expired/withdrawn) are down to 37% from 42.5% a year ago and 44% last month. First time buyers seeking the $8,000 tax credit are creating higher than normal demand. The question is what the market will do after the April 30th end date for tax credit buyers.

Year to date, through March, average sold price is up about 2%. Number sold is up 10%. Other stats are relatively unchanged.

Below is a graph of Austin TX average and median sold values from 1999 through March 2010. Values are about where we were in 2008, which is about where we were in 2006 also.

Finally, Austin sales market month to month for last 25 months. Average sales price has dropped every month this year from the month before, probably because of an increase in cheaper homes being sold to first timers.

As usual, comments or questions welcome.