Preservation, Restoration, and Rehabilitation

Iconic photo of the Singleton House by Julius Shulman

Few would question that architect Richard Neutra was one of the preeminent modernist masters of our time. Some of his most famous works – the Lovell House, the Strathmore Apartments, the Kaufmann Desert House – are considered museum-quality treasures to this day. He had the unique distinction of being featured on the cover of Time Magazine in 1949 – before some of his best works were even on the drawing board. So does that mean his houses should be faithfully restored and impeccably maintained in their original state, frozen in time as the master created them? Or are they homes for the living that need to evolve and adapt to ever-changing lifestyles and to remain viably marketable? (Especially when the alternative is, too often, the wrecking-ball.)

No house has energized this debate more then Neutra’s magnificent Singleton House in the Bel Air neighborhood of Los Angeles. Built in 1959 for the wealthy industrialist Henry Singleton (Teledyne Corp.), and purchased in 2004 by the hair-care tycoon Vidal Sassoon for a reported $6 million, the house was extensively renovated and reconfigured by his wife Ronnie for an attempted “flip” project during the height of the real estate boom. The results, unveiled when the house hit the market in 2008 for an eye-popping $24.5 million, were nothing less than controversial. The milder reviews called the renovation “an act of architectural vandalism” and “hostile to Neutra’s entire vision”.

I’ve toured the house and it remains jaw-droppingly stunning. But is it still a Neutra? What Ronnie did would have been considered brilliant in any other house. She essentially flipped the floorplan around. A small kitchen facing the driveway was moved across the hall to the south side of the house and opened-up to take in the commanding views of the pool and sun-filled vista beyond. This is, after all, where we now spend most of our time with family and friends. (In 1959 the kitchen was strictly the domain of servants.) A row of small bedrooms that turned their backs on the pool and view were moved to where the kitchen used to be on the dark side of the house. A small master bedroom tucked off the living room was converted to additional entertaining space with a built-in bar. And a new wing housing a state-of-the-art master suite with spa-style bathrooms and a screening room was added along the far end of the pool. Ronnie did her best to respect the spirit of Neutra by retaining or replicating the many built-ins throughout the house and matching the original materials in the new bathrooms, down to the 50 year-old fixtures still available at Sears.While still retaining the look and feel of Neutra’s original, there is no doubt the house makes better use of the siting and is far more livable than its predecessor. But the question remains – is it still a Neutra? How would the master himself feel about it? How it will stand the test of time is yet to be determined. After two years on the market, it remains unsold despite a price reduction of over $5 million. And the debate rages on.

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The Election’s Over – So What’s Next for Real Estate?

fortune-tellerNovember 11 2008  JetSetRnv8r has donned his turban and dusted-off his cyrstal ball for a look-see into the future. He knows exactly what’s going to happen and when, but he’s only going to share a little bit at a time to avoid causing a stampede.

As Vice President-elect Joe Biden famously said in one of the debates, “the past is prologue” so let’s take a look back at recent history to put the future into perspective.

Remember 2006? The country was bracing for mid-term elections. The House and Senate had both been under Republican control for twelve years. With an increasingly unpopular Republican president in the oval office, all eyes were on the elections to see if Democrats would make a come-back. There was a lot of anxiety through the summer and fall as these elections were seen as an important indicator to the future direction of the country, the economy, and the conduct of the war.

We didn’t know it then, but in retrospect 2006 was also the start of the leveling-off of the real estate bubble. House prices were reaching a plateau and sales activity was waning. JetSetRnv8r had a newly-completed house on the market. The house had garnered a lot of attention having been widely published, featured on HGTV and on a high-profile design tour. Now that it was on the market, it attracted lots of lookers, including its fair share of coveted celebrity shoppers, but there were no offers as we crossed the dreaded 60-day threshold.

Then came Election Day. Democrats swept both the House and the Senate achieving a clear majority. By 10:00AM the next morning, JetSetRnv8r had three offers on his house. By the end of the week, the house went out in trampoline-bounce3multiples at over asking price to a high-profile television and film star. JetSetRnv8r was not alone. The real estate market throughout Los Angeles experienced a very noticable election bounce that restored the market and pumped a little air back into the slowly deflating bubble, at least for a little while.

The lesson here is that elections do matter. Politics has a powerful effect on consumer confidence, and that directly affects every business including real estate.

So now that we’ve gotten through the most highly anticipated election in American history and elected a wildly popular new President who is expected to take the country in a radically (and welcomed) new direction, will we see an election bounce in the real estate market again? As of this writing, it’s been exactly one week since the election and it’s too soon to tell for sure. But anecdotal evidence collected by JetSetRnv8r among his circle of real estate agent contacts is that there has definitely been a surge in activity.

200187506-001Every realtor surveyed this weekend reported an increased number of calls on long-moribund listings and a frenzy of showing appointments. Attendance at this past Sunday’s open houses was definitely up, at least at those throughout the Hollywood Hills and Beverly Hills visited by JetSetRnv8r. For many months, JetSetRnv8r had been the only person on sign-in sheets and greeted by lonely, over-eager agents who jump up from their quiet reading on the couch. This past Sunday, sign-in sheets were overflowing and houses were comfortably full with the vibe of happy cocktail parties.

Pending Home SalesAs of this writing, JetSetRnv8r knows of no significant offers on long-time listings, but the post-election showings are definitely under way. Thirty to forty days from now will be the time to check the MLS for sales over the previous 30 days – the typical escrow period. Then JetSetRnv8r will reveal a little more of his prediction for the real estate recovery.

If you’re a real estate agent, let us know what you’re experiencing.

Read JetSetRnv8r’s posts on real estate sales trends in Beverly Hills here, the impact of the Wall Street bail-out here, how the real estate market brought down the entire economy here and here, and how to profit in a down market here.

Welcome to a New Era

obama

November 5 2008   The 21st century may be getting off to a late start, but thank goodness it’s finally here!

Happy Halloween 2008

How Did the Falling Real Estate Market Lead to a Global Economic Crisis?

October 27 2008   Real estate has always been cyclical and we’ve been in what looked like a routine down cycle since mid-2006. Real estate has also been the engine of the greater economy with new homeowners buying appliances, furniture, building materials and more – boosting production and creating jobs. So it’s never been surprising when a slow real estate market slows everything down. But how in the world did this real estate bust ever bring down the biggest Wall Street firms and lead to the global economic disaster we’re in today? And why hasn’t this ever happened before? And what are all these new terms we’re hearing like “sub-prime mortgages”, “mortgage-backed securities” and “credit default swaps”? It can all seem mind-boggling, but it’s really quite simple.

In the good ol’ days, your local bank gave you a mortgage for your home and you paid that very same bank back over the next 30-odd years. You may have done all your banking with this particular bank and you and your wife may have even played bridge or tennis with your banker and his wife. Beaver and Opie lived down the street, Donna Reed greeted you at the door in a crisp shirtdress and pearls, Hazel cooked and cleaned while doling-out sassy back-talk, and Father always Knew Best.

For better or worse, those days are long gone. The Republican revolution of the 1980s led by Ronald Reagan followed by Newt Gingrich’s “Contract With America” ushered in a new wave of “small government” and pro-business thinking in Washington. Deregulation became the magic elixir and Wall Street embraced the mantra of “greed is good”. One of the things this new deregulation did was allow banks to sell their mortgages to larger banks, who in turn packaged them together and sold portfolios of these mortgages to investors in financial instruments called “mortgage backed securities”. Some of these portfolios were made up of better quality mortgages, and some of lower quality mortgages and they were rated according to risk. This new packaging of bad loans with good loans made it easier for banks to issue riskier loans to less qualified consumers – and with more people flooding into the housing market, house prices shot up like a rocket. Throughout the 1990s, people who had previously been shut out of the American Dream of home ownership were now welcomed with open arms. Those who wondered how they would ever make the payments when their adjustable rate mortgages actually adjusted were reassured that rising home values would enable them to refinance before their payments increased. Why, they could even take money out of a refi and still lower their payments! Houses became giant ATMs – never mind you were simply giving up equity. There were actually financial experts advising people to never pay off a mortgage – that that was “old-fashioned”, “unsophisticated” thinking!

Before I go any further, let’s take a step back further in time – back to the turn of the last century. The “gilded age” of the 1890s was a decade of rising affluence as cities and municipalities grew rapidly to absorb the mushrooming population of immigrants from the previous 20 years, many of whom were now beginning to prosper. As the industrial revolution took hold, a new wave of manufacturing and service industries grew, and so did the stock market. Investing in stocks became available to the working classes for the first time and with the increase in investors, new investment vehicles sprouted like weeds in a garden. One of these popular new investments was side bets made on the performance of a stock. Without actually buying a stock, you could place a bet that that stock would go up or down. These side bets became known as “derivatives” and they were bought, sold and traded in betting parlors all over the city called “bucket shops”. Since these bucket shops fell outside the scope of federal regulators, nobody was checking to see if the so-called “banks” selling these derivatives had the cash reserves needed to pay off these bets. As the stock market reached a fever pitch in 1907, these derivatives added to the hysteria that led to panic resulting in a stock market crash. So in 1908, this kind of gambling on stocks was made illegal and the bucket shops disappeared. During the depression, even tighter regulation was established by the Securities Exchange Act of 1934.

Now fast-forward to the year 2000. Bill Clinton is a lame-duck President with a Republican-dominated congress. Deregulation is still the mantra and Clinton, a centrist Democrat eager to co-opt the Republican agenda whenever he could, along with his Chairman of the Federal Reserve, Alan Greenspan, enthusiastically signed into law the Commodities Futures Modernization Act of 2000. This not only overturned the 1908 law, but most significantly it removed the trading of derivatives around these new mortgage-backed securities from Federal oversight. Savvy investors could bet that some of these mortgage backed securities would fail as homeowners defaulted on their mortgages. These bets, called “credit default swaps”, were invented by JPMorgan in 1994 as a sort of insurance against outstanding corporate loans and to free-up cash to offset the huge cash reserves they were required to keep against those loans. Hedge fund managers trading them had become the new Masters of the Universe. Now credit default swaps could be traded against mortgage backed securities with no federal oversight – meaning no requirement to keep cash reserves to pay them off, unlike credit default swaps against corporate loans and other investments. Real estate was the new lawless wild west town. This further stimulated a market for ever more risky mortgages, throwing more gasoline on the bonfire. By 2006, the housing bubble began to plateau as prices simply became unsustainable. Homeowners who were counting on refinancing before their mortgages became unaffordable suddenly found themselves “upside-down” (owing more on their house than it was worth). Foreclosures started to mount, swelling to a tidal wave that crashed on the beach in September 2008, wiping out everything in its path, including the giant Wall Street firms who had taken to mortgage-backed securities like a junkie on smack. Without the cash reserves they would have been required to hold had they not been deregulated, they were wiped out.

The problem, as Alan Greenspan now points out, is that he and the others in charge had too much faith in the executives running the banking industry. They believed bankers would be responsible to their shareholders and self-regulate. Instead, these executives paid little attention to the details and took delight in paying themselves enormous bonuses – often in excess of $100 million. Now that a conservative Republican, pro-business/small government administration has (ironically) federalized the banking system, we, the taxpayers, will all be paying for that party for decades to come. Will the bailout work? It’s too soon to tell, but the fact that it’s being administered by the very same Wall Street executives who created the mess doesn’t give JetSetRnv8r much faith. 

Update:  Days after writing this post, it was revealed that the first thing the Wall Street firms did with their federal bail-out money was set aside billions of dollars for executive bonuses. Surprised?

How to Buy Foreclosed Properties

Up till now, I’ve been a flipper of high-end properties.  That may change given the upheavals in our economy and it’s possible I may move into the foreclosure market.  These properties are also called “bank owned property” or “REO” for “real estate owned”.  You’ve probably been hearing a lot about “short sales” too, but that’s something different and I’ll get into that in a separate posting.

In the interest of full disclosure, I have not yet bought a foreclosed property but it’s not for lack of trying.  I’ve been shut out of six offers in recent months because I didn’t know the nuances of the game.  Here’s what I’ve since learned:

 

Banks are dispassionate

When buying from an owner, there is lots of emotion that guides the strategy of the offer and the subsequent negotiations.  When buying from a bank, the property is just a number on a very long list and the bank has no emotional ties to the house whatsoever.  Your offer is reviewed by a bank employee who is following strict policies and procedures.  Your offer either falls within their acceptable parameters and the deal kicks into gear, or it doesn’t and your offer is ignored.  There’s no negotiation so any efforts to try to outsmart the bank are wasted.

 

Understand how the price was determined

Banks are overwhelmed with properties and it’s getting worse by the day.  They do not have the wherewithal to inspect each property or the money to spend $400 or more for a proper appraisal on each and every one.  Instead, they often outsource to a real estate broker for what’s called a “BPO” – a Broker’s Pricing Opinion.  This broker may or may not visit the property – they may establish the price merely by doing some quick desk research and going by gut feel.  (As a former appraiser, I can tell you they also called me for an opinion.)  Since the property is one in a very large portfolio, nobody cares enough to re-think or second-guess the BPO.  I know from having worked with real estate agents and brokers, they will do everything they can to prop up the prices so they will generally come in high – higher than a certified appraiser would.  Even though the banks know this, they’d still rather start on the high side than leave money on the table, so the high estimate is accepted.

 

Know when the price starts to move downward

I made a lowball offer on a foreclosed house while it was within 30 days on market and my offer was ignored.  About 90 days later, it sold for much less than my offer.  What happened?  I was aggressive too soon.  When a foreclosed house is first listed, the bank will be the least flexible on the price.  Once the listing hits 30 to 60 days on market, the bank may start accepting offers that are within 10-15% of the asking price.  At 90 days, they may lower the price and accept offers within a wider margin.  So pay attention to how many days the house has been listed by watching the “Days On Market” or “DOM” on the MLS listing.  And be sure to check the listing price daily – if it drops, it’s time to make your move.

 

Know your market to spot the bargains

Frequent readers of JetSetRnv8r know that my Golden Rule is to buy where you know – know the prices, know the buyers, know the trends, etc.  If you’re an expert on the area, you’ll know if the price on a new listing is high, reasonable or low.  In their rush to get the house listed, the bank may have accepted a BPO which is too low and that should set-off alarm bells in your head.

 

If at first you don’t succeed, try, try again

If the bank doesn’t respond to your first offer within a week at most, don’t wait, they are not going to respond.  Like I said earlier, they do not negotiate so no response is a clear “no thanks”.  Raise your offer a few points and repeat every four to five days until you have a deal.

 

Look for more postings to follow as I wade deeper into the foreclosure pool.  And I invite my readers to contribute their experiences in this burgeoning new market.

 
 

 

Who’s to Blame for the Mortgage Meltdown? You? Me? Or “Them”?

October 15 2008   With the capital markets frozen and the world economy in crisis, everyone is looking for someone to blame.  The airwaves are full of politicians and pundits lashing out at this party or that party.  The Obama-Biden team blames runaway de-regulation dating back to the Reagan administration.  John McCain blames the rampant “greed and corruption on Wall Street” while his running mate likes to wave her school-marm finger at the “predatory lenders”.  Some conservative talk radio hosts blame consumers for not taking “personal responsibility” while more liberal commentators lay the blame squarely at the Bush administration.

 

We’re all swayed by our own reality and frame of reference.  But I can tell you one thing, I’ve worked inside the system and I could see things unraveling years ago.  The system is broken and has been rotting from the inside-out for many years.

 

When I got into real estate investing full time, the first thing I did was get my appraiser’s license as I felt that was the best way to learn the fundamentals of the industry.  I freelanced for two appraisal companies (more on the life of an appraiser in a separate posting) and had a handful of my own clients who were mortgage brokers.  Banks worked only with the most senior, experienced appraisers who might sub-contract the work to less-experienced appraisers such as myself.  But mortgage brokers preyed on new appraisers who they knew were the most desperate for the work and would do whatever it takes to deliver the desired outcome.  Banks paid their appraisers within days – mortgage brokers paid whenever they felt like it, if at all.  And if pressed for payment, they’d drop you for another new appraiser.

 

I can attest first-hand that appraisers have been under tremendous pressure to “hit the number” – that is, bring the appraisal in at the value needed by all parties – sellers, buyers, agents, mortgage brokers and bankers – for the deal to go through. 

 

What does this mean?  OK, think back to the go-go years of 2003, 2004, 2005.  Values are rising up to 20% per year.  An aggressive seller prices his house high.  An eager buyer, convinced by his agent and financial advisors that values are rising fast, agrees to the price – or offers an even higher price to best any competitive bids – and applies for a mortgage.  Both the buyer’s and seller’s real estate agents as well as the mortgage broker and bank all have an incentive for that price to be as high as possible as everyone along the chain is earning a commission on that sale price.  The mortgage broker – or the bank – hires the appraiser and seeks the one who they know will turn the appraisal around the fastest (2-3 days) with the fewest problems. 

 

The appraisal must be based on “comps” – or the actual sales of comparable homes in the neighborhood during the past few months.  Not listings, not pending sales, not sales that fell out of escrow but actual closed sales.  There are tight guidelines for what kinds of sales are appropriate comps – they must be in the immediate neighborhood – across a busy road or higher up a hill should not be used as neighborhoods can change within a block or two.  Houses larger or smaller by a factor of 20% should not be used.  Houses of similar condition are sought – if the “subject property” (the house being appraised) is a fixer or newly renovated, than the comps should also be fixers or recently renovated.  Amenities such as room counts, bathroom counts, fireplaces, pools, views and number of garage spaces are all considered.  The appraiser finds anywhere from eight, nine, ten or more potential comps and narrows the choice down to three to five for the appraisal report.  Adjustments are made to each comp – adding or deducting value to account for differences from the subject property.  It is three parts science and one part art and requires sound judgment, in-depth knowledge of the area and experience.  The appraiser has the most at stake here as any mistakes or the slightest appearance of fraud can lead to loss of work or worse – lawsuits or loss of their license.

 

Aggressive seller’s agents often meet the appraiser with stacks of “comps” they’ve pulled.  They do this under the guise of being helpful but their real motive is to try to ensure that the appraiser uses the best comps – the highest sales – for their reports.  These comps, however, are rarely useful and the appraiser is discouraged from accepting them.  They pull from better neighborhoods or larger homes in better condition.  Since refusing them will raise red-flags with the agent, the savvy appraiser accepts them with a smile then throws them away.

 

During the recent real estate boom, mortgage brokers (like my clients) would call and say “I need this house to come in at $X”.  Right off the bat, this is a violation of the ethics rules as they are not supposed to pressure the appraiser or influence the outcome.  It wasn’t unusual for the mortgage broker to call two or three appraisers and ask each one for a verbal confirmation on that phone call that they could “hit it” before they’d be hired – also a violation.  If the appraiser couldn’t meet that number, this could kill the sale which would incur the wrath of all parties so that appraisal would be thrown away and a new appraiser hired until they got the results they wanted.  When this happened, everyone accused the appraiser of incompetence and that appraiser would not only not get paid for his work (anywhere from $350 to $1,200) but would be black-balled from any future work from all parties involved in that deal.  It only took one or two such instances to kill a career.  Appraisers who cooperated were highly sought-after and got lots of work from strong referrals throughout the industry.

 

Appraisers did not stand idly by.  They were screaming bloody murder at anyone who would listen – banks, industry organizations, even the press.

 

So who’s to blame for the current crisis?  I blame the legislators who created a system that motivated and rewarded inflated values if not outright fraud.  The consumer is the hapless victim and is the last person who should be blamed.  The consumer was just following the advice of experts they relied on and the government who encouraged them through tax incentives and a steady drumbeat of homeownership as “The American Dream”.

 

How to Find and Hire a Contractor

The selection of a contractor is the single most important part of your project.  Whether you’re remodeling a kitchen, building an addition to your home, or undertaking a complete gut-to-the-studs remodel, the contractor is the one who is going to fulfill your expectations – or not.

 

The first question to ask yourself is; are you going to be working with an architect?  (More on that here.)  If so, then the selection of a contractor is a joint effort between the two of you and the architect can be your guide.  Just remember that the final decision is up to you.  Even if your architect has a contractor he frequently works with, insist on interviewing and bidding at least two more and doing your due diligence as described below to make sure you’re comfortable with your architect’s choice.  NEVER blindly accept your architect’s contractor.

 

Another option is to work with a design-build firm.  For more on that, read this.

 

If you’re not working with an architect or a design-build firm, then it’s all up to you.  Don’t rush it.  Don’t hire the first person you find.  Expect to take your time and interview as many contractors as possible until you feel like an expert in your own right.  You need to be completely comfortable and confident with your final choice.  The worst thing you can do is put yourself in a position where you’re going to have to hire a second contractor to finish the job – or fix the first one’s mistakes.

 

I think of the process in three phases – 1) initial screening, 2) due-diligence, and 3) final negotiations.  Here’s how to proceed:

 

Phase 1 – Screening

1.  Collect referrals.  Cast a wide net.  Talk to as many friends and relatives in your area that you can find and ask them who they know.  Better yet, canvass your neighborhood.  If anyone has had work done that you like, find out who did it.  It’s an added plus to have a contractor who commonly works in your neighborhood and knows the particular quirks of the area.  Try to get at least five or six candidates – I started with as many as ten for my first project.  Do not waste your time looking in the phone book or responding to flyers tucked in your mailbox. 

 

2.  Meet face-to-face.  Your contractor is going to be your partner – a member of your family for many months.  It’s important to work with someone you like and can communicate with.  Do they respond to an invitation to meet?  You’d be surprised how many contractors don’t even return a phone call.  How promptly do they respond?  It’s important that they be readily available and responsive when you need them.  Do they come prepared for the meeting?  Don’t tell them what to bring – see if they adequately prepare on their own.  A good, professional, business-like contractor will bring photos of other jobs they’ve done, sample contracts and invoices, and a list of references.  I’ve had some even give a Powerpoint presentation.

 

3.  Let him/her talk first.  In your first meeting, resist the urge to do all the talking or to show off your home.  Let the contractor start the meeting.  You’ll learn more by seeing how he/she fills the awkward silence.  Save your questions till the end after you see what information they volunteer.

 

4.  Be prepared with your list of questions.  And take lots of notes.  Go into the meeting knowing exactly what you want to know before the meeting ends.  Make yourself a checklist and use it for every interview so you can compare apples-to-apples when you’re making your final selection.  Then, whatever they don’t answer on their own, you can start asking the right questions.  These should include:

  • Are they licensed and bonded? 
  • How long have they been in business?
  • How many employees do they have?  Some contractors may work alone, some might head a big company.  One’s not necessarily better than another but be aware that if you work with a one-man-band, what happens if he gets sick or has an emergency?
  • What’s the biggest job they’ve ever done?  What’s the smallest?  What kind of projects do they do most often?  See where your project falls in their field of experience.
  • Who are their subcontractors?  Even the largest contractors sub-contract specialty work like plumbing, electrical, concrete, etc. and a contractor is only as good as his subs.  How long have they worked with each of them and how deep is the relationship?  How much control will you have over their subs (if you want any).  What is their bidding process when working with subs.  Will you be able to bring in your own subs (if you know any). 
  • How many jobs do they typically carry at the same time?  How many other jobs will they have while they work on your project?  Will you be their only job or will you be competing for their attention with other projects?  A large contractor with other jobs will be more likely to be financially stable than a lone operator who’s always cash-strapped – just be sure they have a team dedicated to your project so you will feel like their only – or most important – client. 
  • Ask them to describe their best and worst experiences.  What has made particular projects more successful than others?  How have they resolved differences with difficult clients?
  • How long do they estimate your project will take?  How do they stick to a schedule?  What’s their track record of finishing on time or finishing late?  What issues might they encounter on your project that could cause delays?
  • What does their typical contract look like?  Do they prefer to work on a fixed-price or cost-plus basis?  How flexible are they if you want to buy some materials like appliances and fixtures directly to save money?  (More on that here.)
  • How do they bill?  What does their typical invoice look like?  How much detail and back-up do they provide?  How quickly do they expect you to turn around payment?

5.  Set your own rules.  Regardless of their preferences, they need to accommodate how you want to work.  What kind of contract do you want – fixed price or cost-plus?  How do you want to be billed and how often?  How long do you need to turn around payment?  What kind of back-up and detail do you want to see on your invoices?  The right contractor for your job will be flexible enough to meet your needs – or provide a convincing explanation for why they prefer to work their way.

 

6.  Now discuss your specific job.  After you’ve learned everything about the candidate, then show them your house and discuss what you want done.  Be general – leave details open-ended – see what information they ask for or what suggestions they have.  A good contractor won’t be afraid to suggest alternatives you might not have thought about, or point out problems or issues such as supporting walls, space utilization or potential permit issues.

 

7.  Get references.  References are paramount and any decent contractor should come prepared with names and phone numbers – or promise to get back to you quickly with them.  Get at least three client references – but also ask to talk to two or three sub-contractors or suppliers in addition to clients.

 

8.  End the meeting.  Thank them and send them on their way.  See what kind of follow-up they do.  See if they call to thank you for the meeting and propose next steps.  See how quickly they get back to you with promised follow-up information like references or a sample contract.  See how eager they are to earn your work.

 

Phase 2 – Due Diligence

1.  Call their references.  They should have prepped their clients to expect your call so don’t be shy.  Ask them how satisfied they are and if they would work with the same contractor again.  Ask them if the contractor met their expectations.  Most importantly, ask them to describe a conflict or disagreement and how they worked through it.  Nobody is perfect and your job is going to be stressful.  Working through your differences will strengthen your relationship.

 

2.  Arrange to meet again – but at their office this time.  See how established they are.  See how they run their business.  See how busy they are.  Meet their team.  Talk about the results of your reference calls and any new questions that have arisen.

 

3.  Ask for site inspections.  Ask each candidate to take you to at least two, if not three client’s homes and show you their work first-hand.  They should have a good enough relationship with past clients to be able to set this up.  If not – that’s a huge red-flag and stop right there.  A satisfied client should be more than happy and proud to show off their home.  My contractor is always parading prospective new clients through my projects and I’m more than happy to oblige.

 

Phase 3 – Contract Negotiation

By now you should have narrowed it down to two or three finalists.  Don’t dismiss anyone until you’ve signed contracts with your first choice – you never know for sure till the ink is dry and going to your back-up after you’ve dismissed him puts him in a stronger negotiating position. 

 

There’s so much involved in negotiating a contract that I’ve saved it for a separate posting.  Look for it here.  But in summary:

  • Decide how you want to work and be firm.  With everything you’ve learned up to now, you’ll know if you want a fixed-price or cost-plus contract.  (More on that here.) 
  • How do you want to be billed?  How much back-up do you want to see?
  • How amenable is he/she to letting you save money by buying appliances and materials yourself?  Or subbing parts of the job yourself?  This gets complicated so I’ll address it in a separate posting.
  • What kind of assurances can you build-in to the contract for them to stay on schedule?  Again, more on this later.

This is a lot of information but there’s a lot involved in hiring a contractor.  Stay tuned for a separate posting about negotiating your contract and feel free to contact me through this blog with any questions.  I’m here to help.

  

 

What Does the Wall Street Bail-out Mean For You*?

* By “you”, of course, I mean “me” – unless you’re also a Beverly Hills real estate investor and flip-artist.

 

October 3 2008   Excuse me for not posting for a couple weeks, but I’ve been glued to every and any news source I can find to follow the meltdown of our financial system – and staving off my own emotional meltdown in the process.  Regardless of your politics, there’s plenty of blame to be shared across both sides of the aisle and this has been a long-time coming.  Like many of us, I’ve been hearing dire warnings from friends on Wall Street for over a year and dismissed them as kill-joy doomsayers like the crazy guy on the street-corner with the “The End Is Nigh” sign.  Let’s just hope he’s not right, too.

 

The silver lining to this gloomy black thunderhead of a cloud is that this could usher in a whole new era of better government, better oversight, stronger regulation and a newer, stronger, more vibrant and sound economy that opens new opportunities for all of us.  Or not.  We’ll start to find out a month from now.

 

Preparation plus opportunity equals success.  It’s an old saying with many taking credit for it but it’s true and timely.  Every change – no matter how painful – brings opportunity for those who are able to identify it and adapt to take advantage of it.  The real estate business will fundamentally change.  “Flipping” houses may or may not be a viable strategy at least for the near future but plenty of opportunities will exist – some we may not even have thought of yet.

 

The bright spot in the otherwise dreary real estate market up to now has been the high-end.  As the American middle-class weakens, the world’s rich have been getting richer as evidenced by the over-the-top demand for ultra-luxury goods including million-dollar cars and diamond-encrusted human skulls.  The very top-end of the real estate market in the select areas of Beverly Hills, Bel Air and Malibu (“Bevairbu”) has remained strong with a few clever realtors having their strongest years ever.  Houses in $10 to $30 million range in Bevairbu have been selling briskly to all-cash buyers.  When you’re not applying for a loan, you don’t care about mortgage rates.  And you can rationalize paying prices above appraisal values.  This explains the McCourt’s $19 million purchase of a crumbling beach shack on Malibu’s Carbon Beach next door to the Lautner-designed house they bought for over $33 million.  The number of sales of homes over $15 million in Beverly Hills and Bel Air increased over the last 12 months (ending October 1 2008) to a five-year high with more sales than ever getting near or above asking price in fewer than 70 days on market.  Remarkable, given what’s been going on everywhere else.  And positive sales trends in Beverly Hills is reported in a separate posting here.

 

Is that party over?  Too soon to tell for sure.  The world’s super-rich may be too insulated to be affected.  Most of these buyers are foreigners – Russian oligarchs, Middle Eastern oil barons or members of exiled political regimes.  They may be drawn more than ever to the relatively stable market of Los Angeles’ Westside in an increasingly unstable world.

 

My advice for the near term is to move into rental properties, building a portfolio of small homes in solid middle-class neighborhoods with a minimum of a five-year time horizon while keeping an eye on the sales activity in the usually recession-proof Bevairbu. 

 

For more about investing in this tumultuous market, read “Amid the Chaos, Is This Any Time to Invest in Real Estate?

Check back in a few months to see how my advice holds.

Amid the Chaos, Is This Any Time to Invest in Real Estate?

September 21 2008   Bear Stearns!  Goldman Sachs!  Lehman Brothers!  AIG!  Fannie Mae!  Freddie Mac!  Wall Street bail-outs!  Every day a new sensational headline about the meltdown on Wall Street.  Just when we think it can’t get any worse, it does.  So what, exactly, does this mean for real estate investors and is this any time to get into – or out of – the market?

 

Before I answer that, let me share a secret.  It’s the secret to success in business and investing.  And I’m going to share it with you, just you, dear reader.  Ready?  Come close.  Lean into the computer.  Here it is… 

 

“Buy low and sell high.” 

 

That’s right.  Repeat it a few times.  Write it down, if necessary, so you don’t forget it.  All you have to do is invest when prices are low and sell when they’re high!  That’s all there is to it!  It’s that simple.  The only thing you have to figure out is when the prices are low and when they are high.  When you figure that out, let me know. 

 

I can’t tell you when prices are going to be high but I can tell you one thing, they’re low right now.  They might even get a little lower – but the fact of the matter is, they’re pretty darn low today.  And I can tell you one other thing – they will rise.  I can’t tell you exactly when, but I’m pretty sure that within five years they will have at least recovered to their pre-crash levels if not more. 

 

Without getting into the detail of it, real estate has, historically, consistently delivered some of the highest returns on investment over time.  Sure, there are ups and downs along the way and speculators have been known to get reckless and homeowners have suffered.  But those losses almost always occur when there’s a short-term time horizon and homeowners or speculators are banking on short-term gains.  Investors who endure and succeed are the ones who are in it for the long term. 

 

I learned that lesson the hard way with my first real estate investment.  I was looking for a quick buck from flipping a co-op in New York City in the mid 1980s and I lost when conditions in the neighborhood suddenly made it un-sellable.  (The city opened three welfare hotels immediately adjacent to the building.)  At the time, I felt like the first person ever to lose money in the go-go Manhattan real estate market – but I wasn’t the first, nor the last.  Those welfare hotels were gone two years later and the neighborhood quickly gentrified.  In fact, one of those “welfare hotels” became one of the first of the new wave of “hip” high-end hotels.  If I’d had the wisdom, wherewithal and resources to hold on, my $75,000 investment would have been worth at least $1.5 million today.  On top of that, I would have taken in nearly another million dollars in rental income by now.  The property would have been fully capitalized (paid for itself) after only seven years with the remaining fifteen years providing pure profit.  Even after expenses and taxes, that’s not so bad.  My partner in that deal did hold on and that co-op is one of the best performing assets in his investment portfolio today – and he’s a successful hedge fund manager.

 

I predict that five-to-ten years from now, many of the people we read about in the Wall Street Journal and on the Forbes 400 list will have made their fortunes building their real estate portfolios today. 

 

So back to today.  Prices are at historic lows.  Foreclosures are at an all-time high.  The rental market is red-hot with rents rising.  Inventories are at an all-time high making it as much a buyer’s market as it ever gets.  Here’s where two-plus-two equals five.  This is an unprecedented buying opportunity for investors.  A recent article in the New York Times (“Finding Profits in a Distressed Market” 9/14/08) quotes Gene Hacker of Century 21; “You’ll probably never see anything like this in your lifetime again.  With the rental market as strong as it is, and prices as low as they’ve been, this is as good as it gets.”

Here’s my advice.  Buying foreclosures and other well-priced distressed properties and running them as rental properties with a long-term time horizon of five years or more could be a very smart move right now.  That’s why I’m talking to my partners about investing our money in residential income properties – maybe even some commercial properties like small retail centers and coin laundries. 

But pick your markets carefully and, like anything, invest only in what you know and do your research.  For example, I only invest in Los Angeles where the booming entertainment industry sustains an economy insulated from the rest of the country and international jet-setters will always flock to the enduring cachet of Beverly Hills and Malibu.  (Read about sales trends in Beverly Hills here.)  Having worked in the entertainment industry, I understand these buyers.  I would not invest in markets that are shrinking or over-saturated – Phoenix, Las Vegas and Miami come to mind (although I have a friend doing okay with vacation rentals in Tucson – the poor-man’s Santa Fe.)   

 

Stay tuned and I’ll let you know how it goes.  And let me know what you’re doing out there.

 

For more information about investing in this tumultuous market, read “What Does the Wall Street Bail-Out Mean For You?”  And look for future postings here about how to find and buy foreclosed properties, evaluate a real estate investment including calculating the capitalization rate and rate of return.