Gonna Save Money By Renting, Eh?
I find myself working the Scottsdale rental market more often these days than in years past. With a large percentage of the populace having been converted from homeowner to renter after selling a home short or losing it to foreclosure (thus, effectively eliminating themselves from the buyer pool for the foreseeable future due to credit damage and/or home ownership malaise), and would-be sellers opting to lease their current homes out rather than taking a huge equity bath if circumstances force a move, it’s an arena in which Realtors are currently in high demand. So it was that I was researching rental home availability for a couple of clients this afternoon in the McCormick Ranch area.
While I’ve been aware of a diminished number of available rental properties coinciding with rising rents for some time now, I was shocked by the dearth of options I turned up in ordinarily easy to fit parameters.
For instance, there are exactly ZERO active unfurnished, single-family home listings in the 85258 zip code (McCormick Ranch, Scottsdale Ranch, Gainey Ranch, etc) for lease under $2000 a month at present. None, zilch, nada. This in a zip code that has fetched an average price per square foot of $164.89 for single family homes in the past six months (Aug 16, 2010 – Feb 16, 2011) .
Extrapolating the sales price of a 3 bedroom, 1800 square foot house based on that per foot average, current resale market value would be approximately $296,892 without adjusting for +/- factors.
Intrigued, I was drawn to crunch the affordability numbers on such a property.
Given that many buyers today are trying to get a foot in the door for the least amount of up front expense as possible, let’s pre-suppose a 3.5% down payment for a 30 year, fixed FHA loan. Assuming an interest rate in the 5.25% range, and tacking on the additional .5% for monthly PMI, the principal and interest payments on a loan balance of $286,501 at 5.75% is $1671.94. Add in property tax and insurance estimates of approximately $170 and $70 respectively for a total monthly PITI payment of $1911.94. Throw in the $15/month McCormick Ranch POA dues, and you are sitting on an approximate monthly outlay of $1926.94.
It should go without saying that figure decreases with a larger down payment.
A twenty percent down conventional borrower, for example, avoids the monthly mortgage insurance, thereby getting a significantly better annual percentage rate (credit and all other factors being equal) to coincide with the lower principal balance.
Now to rent this same property, back to the MLS we go.
If you were in the market to lease an unfurnished, single-family home in 85258 today, you would have exactly six choices: the cheapest of which is a 1900 square footer currently listed for $2195/month in McCormick Ranch. It bears repeating that the CHEAPEST available rental property in the category today costs almost $300 more per month (less potential maintenance costs of home ownership, but also ignoring potential tax benefits) than it would to purchase the same house with the lowest down payment available to most borrowers.
That is staggering.
Thinking the paltry number of available rentals might be an anomaly confined to a sought after zip code, I delved into the cheaper, neighboring zips of 85250 and 85251 in South Scottsdale. Going back just six months ago, a prospective tenant had his/her choice of remodeled 1950s-1960s ranch homes in the $800-1500 / month range. After all, these are zip codes in which a single-family, 3 bedroom, 1500 square foot home can be had in the 150-175k range these days.
The current rental inventory?
- There are 2 single-family homes for lease under $1500/month in 85250.
- There are 5 single-family homes for lease under $1500 / month in 85251.
Want to do you're own sleuthing?
Make your own comparisons by searching the current inventory.
Scottsdale Rental Homes | Scottsdale Homes for Sale
There is no moral of the story other than the context given to recent reports that tout home ownership in Scottsdale as having surpassed renting in affordability. I treat all such reports with healthy skepticism, as one must always question the source as well as the metrics used, but this is some news that actually jives with what I am seeing in the trenches. Much as it reads like more hot air designed to spur consumer confidence, there is merit to the attention given the growing disconnect between housing values and rental rates.
It’s a good time to be a landlord.
If nothing else, it will be interesting to see what effect, if any, this trend has on strategic defaults and short sales. Homeowners who are confident that ample affordable rental options await them may have to think a bit longer and harder before walking away from an underwater mortgage if the monthly payment is still manageable (homeowners who walk more from the distaste for lost value than ability to pay, in other words). On top of the higher rents, the reduced competition allows a landlord to be pickier with the choice of tenant. Recent credit / financial woes are only overlooked to the extent of one’s prospects. When there are 10 houses to every renter, it’s easy to find a forgiving landlord. But when there are 10 renters to every home … not so much.
Long essay short, a homeowner may want to do some additional research before opting to become a former homeowner. There is danger of jumping out of the frying pan and into the fire if precautions haven’t been taken to ensure that a markedly better living situation awaits.
While it has become an Olympic sport to predict the direction of the market with downward pressure on pricing here, and upward pressure on rates there, I’ll leave the prognosticating to the eggheads in the ivory tower. I will go on record saying this, however:
Prices are falling and rents are rising. Do the math.
Buy. Scottsdale. Real Estate. Now.
The closing table is no place for incompetence. The crescendo to a Real Estate transaction, the signing of loan documents and the final settlement statement is representative of a successful navigation of the escrow obstacle course. If it were a cinematic experience, an empowering musical score would soar over the montage of conquered struggles that it took to get to this point. While a few credits have to roll before the buyer can officially call the property home, namely lender funding of the loan and recordation of the deed, smiles and handshakes accompany the last executed signature in the two inch stack of paperwork, nonetheless. In years past, agents and consumers alike have been spoiled by the well-oiled machine that was the title and escrow field. Catastrophes arose, catastrophes abated and we lost our minds if a closing was delayed twenty four hours by unavoidable eventualities.
These days, I consider myself lucky if a closing isn’t delayed two weeks and my clients draw anyone other than Sparky, the one brain-celled signing agent.
With new disclosure regulations, a completely different settlement statement and a host of new concerns with the transfer of clear title due to the pervasiveness of foreclosure and short sale properties in our midst, an accomplished escrow officer has never been more vital to the process of a home sale. Unfortunately, many of the good ones were forced out of the industry when the market hit the skids in 2007. When sales finally began to rebound, the major title/escrow companies restocked their ghost offices. As the predominance of these properties were distressed, however, it was the REO (bank foreclosures) and short sale divisions that welcomed new staff. The resale divisions remain largely undermanned.
The REO division of a title company is an entirely different universe. Like that of a REALTOR who specializes in listing bank property, transactional volume is ludicrously high. Too many files on too few desks. You can imagine how this translates to the urgency with which your file gets treated. Another component that is not necessarily to the buyer’s benefit is the relationship between the bank and the title company they have procured. Supposedly a neutral third party whose purpose is to convey the property from the current owner to the buyer, the myth of its transactional Switzerland is a tale taller than the Alps. If the sheer dollars involved in a title company’s relationship with a bank (or the bank’s asset management affiliate) does not dictate outright obedience to the demands/whims of one party over the other, it sure does influence behavior. I have been nonplussed during the course of bank property transactions (the buyer MUST use the bank-selected title company if his/her offer is to be accepted) in which the title company is the one contacting me with seller demands, essentially performing the role of the listing agent by proxy.
It is expected that one will have to tolerate a third party that is subservient to its master in a bank property sale (and not overly concerned with getting the file closed in a timely fashion to boot), but problems are now creeping into “normal” resale transactions between living, breathing human buyers and sellers. For starters, with many resale divisions depleted of adequate staff, it is not an unlikely scenario to get stuck with an escrow officer who primarily handles REO accounts. Flip a coin between whether said officer is overworked or under-experienced, but too often lately a less than exemplary job is being done. Documents are not being requested/delivered on time, assistants are left to answer questions they are not ready to field, communication between the officer and the buyer’s lender is nonexistent … I’ve even encountered “signing agents” at closing who are neither the selected escrow officer, nor capable of explaining the documents upon which they want your signatures. One clown literally tossed the paperwork in my lap and told me to explain it all to my clients. Had I not been rendered utterly speechless, I would have ordered the hall monitor to escort the fresh lad to detention.
Mind you, these are not mom & pop style title companies, but reputable names that do a very high volume (perhaps too high?) of business.
The moral of the story? Unless you are purchasing a bank property, and thereby resigned to the amusement of escrow fate, you have a choice in the matter. As the buyer, you get first crack at naming the title company in your initial offer. Sellers (upon direction from their chosen representatives most often) may list their own preferred company amongst the terms that are countered, but don’t cave. Unless your agent can point to specific, positive dealings with said officer/company in the past, I urge you to stick to your guns. Going back four or five years, a title company was largely a disposable part of the negotiation. As long as you got your price, you let the other party get the perceived “win” of naming the company. The recent changes to the escrow landscape make such a laissez faire approach to the title work fraught with peril. Make this term non-negotiable. More often than not, the other party will buckle rather than lose a sale over what many still consider a minor point.
When selecting a company, your chosen agent is the best source of advice. We have favorites for a reason, and it is not monetary. Through trial and error, we find excellence in all of our affiliates. When we find a diligent service provider, we are loyal. In this day and age, though, a little prevent defense is still warranted. Ask your agent who underwrites the title policies of his recommended escrow company (title and escrow are not necessarily synonymous) before satisfying yourself as to its viability.
I happen to use Jenny Werner with First Arizona Title. Her policies are underwritten by the big boys at First American. She chaperones her files quite adeptly to prevent avoidable delays and miscues, and is very responsive to consumer questions/concerns. Whether you employ me to assist you in the purchase of a home or not, I highly recommend you write Jenny’s services into the agreement. Your movers and peace of mind will thank you for it. Eventually, the other party will as well.
Jenny Werner, First Arizona Title
11333 N. Scottsdale Road
Scottsdale, AZ 85254
Phone: (480) 385-6500
Fax: (480) 385-6800
Real Estate Investor.
The phrase alone inspires a host of reactions that run the full gamut between antipathy and, well, slightly lesser antipathy, depending on the audience.
As any semi-interested news watcher and industry blog reader can attest, the Real Estate investor is the greatest scourge to befall our fragile ecosystem since polybutylene plumbing. What, with the housing supply lines ill-equipped to handle the artificial demand, our flimsy pipes swell and burst when the pump and dump investment surge strikes a hapless market. Aside from the banks who flooded Wall Street with dubious mortgage backed securities that were chopped and reconstituted in more numerous and indiscernible ways than Joan Rivers’ alleged face, the fount of no-money-down investors is the most vocally derided catalyst of the Great Real Estate Bubble of 2005 ©.
Well, guess what? The investor is back … and that’s a good thing.
Hold your rotten tomatoes and easy with the pitchforks, if you will. How can I possibly opine that the reemergence of the buyer subset that sent values through the roof, only to crash them through the basement when they left a valley of foreclosed “investments” in their wake is a good thing? Is the demand any less artificial now than it was when the previous incarnation of ne’er do wells spiked our collective punchbowl?
In a word, yes.
The 2010 investor is not the fly-by-night operator who purchased the nearest home for sale at the conclusion of a four hour seminar on how to get rich in Real Estate investing with no money down. Shoot, who needed money down when you barely needed a pulse and a job to buy a house back then? No, today’s investor, by and large, is showing up at trustee sales and plunking down cash on a barrel. He has the skin in the game that his counterpart of yesteryear did not. He is investing in a very real sense of the word.
In addition to securing an interest in the property with his own bankroll (thus making the prospects of simply walking away from a property that doesn’t return as hoped less palatable), the other crucial dynamic at play is the return of sanity to the overall investment arena. When investors were driving Scottsdale and Phoenix property values into the stratosphere back in 2005, there was little regard to the initial purchase price. Our entire market temporarily forgot that you make your money on the purchase. Buy a property right, and the return will be there when it’s time to sell. In the throes of insanity, investors were climbing over themselves and each other to purchase property, any property, for 50k over whatever ludicrous price was being sought by an apoplectic seller. Investors were betting on the come. Pay whatever now, and the joint will be worth 100k more in two months whether a hammer is ever swung in renovation or not. With the year long fervor, they got away with it … for awhile.
Today’s investor is not settling for just any property he can get his hands on, but is showing up at the courthouse and robbing the bank blind. Paying pennies on the dollar and rehabbing a previously dismantled home, his margin is large enough to bring the distressed apple of his eye to market at a price actually supported by recent sales comps.
The coup de grace? Today’s investor fills a need that the banks won’t. He is essentially financing the fix-up costs that many banks have abandoned in self-defense. Against a backdrop of tight lending purse strings, consider the difficulty many people have just in coming up with 3.5% or 20% down payments, let alone remodeling capital. With home equity lines all but vanished from the marketplace, that stripped bank-owned home bargain isn’t all that realistic for the buyer who doesn’t have the available cash to put it back together, regardless of how appealing the price tag. When you could tap a line of credit to finance improvements, it wasn’t that big of a deal to throw in some new carpet, counter tops and appliances after closing. Now, you have few options other than reaching into your own pockets. Thus, there is a sizable buyer pool for a move-in ready home. The well heeled investor who assumes the risk and fills that need is not to be derided.
Take the mom & pop homeowners who are unable to price their homes competitively due to high loan balances, mix with the interminable wait of short sales, fold in the distressed condition of much of the bank-owned inventory and bake at four hundred degrees to create a casserole of supreme frustration for many disenchanted home shoppers. A rehabbed home at an affordable price, if not the outright theft that was envisioned at the outset of their house hunt, begins to look more and more appealing to many buyers after getting an up close look at what the reputed bargains actually look like live and in color. In essence, by purchasing a property from an investor, a buyer has found an end-around to financing renovation costs.
If your last nickel is earmarked for your down payment, and you can purchase a renovated home at a fair market value that you can afford, don’t begrudge the man his margin. While the stereotype of the lecherous vulture remains, we would be remiss not to acknowledge the good he can, and does, bring to a market like ours.
Investors: they’re not just for nuclear Real Estate holocausts anymore.
Picture a bowl of primordial soup. No, really picture it. What does it look like? I see a gelatinous, gray gumbo of sorts. The contents within completely impervious to the light of the sun underneath an opaque, spoon-devouring outer layer. I don’t need to make out the individual invertebrates that I sense roiling about the porcelain confines to intuit that a wayward finger would disappear into tiny, prehistoric mandibles within moments of straying into the land of the culinary lost.
Of course, I am talking about bank owned property sales. If the creepy crawlies in the walls don’t get you, the asset managers will.
About a year and a half ago, I, like many of my Real Estate brethren, was forced to take stock of the focus of my career. Having long relied on the nearly continuous repeat and referral business that I cultivated through years of diligent service, I was forced to ponder the unponderable when the Great Market Implosion of 2008 (c) threatened to sabotage my business model. If you could even call it a business model, that is. I subscribe to the notion that if you do right by the clients that you have now, you will never want for clients in the future. Good business practice begets good client retention.
And yet, there I was. Looking around for the vine upon which my new business had died amidst the economic crop dusting that was rendering entire markets fallow. My hedgerow bustled only with concern. So what to do? With credit markets drying up and loans increasingly difficult to come by, the resale market became a stagnant bog. The only sign of life would be Nessie popping her head above the surface of the foreclosure loch on occasion to swallow another hapless homeowner. Against this stark backdrop, many of my respected colleagues turned to the very institutions that led us down this path to housing oblivion for their salvation. Sensing that resale properties could not compete with the dirt cheap foreclosures, and that finding loans for buyers had become vastly more difficult than finding properties, I was tempted to follow suit.
The lure of pursuing bank-owned property listings was … gulp … quite tantalizing. I saw REO agents handling more properties at a given time than they ordinarily handled over the course of an entire year while I banged my head against the resale wall. Heeding the siren’s song, I went so far as to solicit lists of banks with whom I could apply to handle their overflowing inventories. Hat in hand, it struck me that this was the 21st century version of standing in line for hours on end amidst scores of other able-bodied candidates for a factory job circa 1930. A funny thing happened en route to the head of the line, however. An epiphany, if you will.
In the current market, we all work for the banks in one manner or another. You either list their houses, or you bring them buyers. Only one side of that equation will bring you repeat business down the line, however. I realized that I could not take on the workload that REO specialists enjoy tolerate without alienating the loyal client base that had propelled me to heights I had never really thought possible in my career. Knowing there are only so many hours in the day, I made the conscious decision to forgo the possibility of immediate gratification with the banks to continue to serve real people. It’s not an entirely altruistic choice either, but a pragmatic one. The foreclosure market will dry up eventually, leaving the few remaining morsels to the established denizens of the deep who have waded through that knee-deep filth for the last two decades. Those Johnny Come Latelys whose bank-owned property experience extends back a year or two will be in the unenviable position of having to redefine their expertise yet again. Their neglected mom and pop clients will have moved on.
I do not want to watch my business wash up on the rocks along with the myriad other souls aimlessly following the tide on a makeshift raft of sticks and desperation when the winds finally change. I’ll continue to take my chances with my own internal compass and weather-battered crew.
So, here you sit. Spoon in hand, ready to dive into that noxious looking soup. It may not be the most appetizing dish you have ever seen, but it’s the house special and the price is right. The maitre d’ has already slipped back into the kitchen, hurriedly gathering the same ladled gruel for the next table.
No fear, your royal tester is still here. Pass that gnarly bowl on over and I’ll help you determine its edibility.
I was sitting on your side of the table when we were eating steak and lobster, and I’m not looking for the check now that my dinner guests can only afford spam. It may bring a little indigestion on this particular evening, but there are plenty of four star evenings ahead.
If you are buying or selling a home in Scottsdale, Arizona, and you are not an amorphous, soul crushing financial institution, it would be my great privilege to represent you in your pursuits.
My wife has an affinity for collecting quotes. Whether humorous or inspirational, on fridge magnets or flowery stationary, she likes having the visible reminders nearby as a lifeline to help pull her out of whatever malaise she may happen to find herself mired in at a given moment. Truth be told, prone as I am to ridicule the sappy sentimentality, I kind of like having them around the house, too. Sitting here in the kitchen on a slowly unfolding Sunday morning, sipping my first cup of coffee and awaiting the incubating bounty of cranberry muffins that is teasing my nose and stomach, one particular wall hanging catches my eye. Emblazoned across its whitewashed, faux wooden surface in black scroll lettering is the following:
“Raising children is like trying to nail jello to a tree.”
Not the first time I have seen it, but it still draws a chuckle. Substitute the words “Selling Real Estate” for “Raising Children,” and you have this agent’s description of the arduous world of buying and selling property in 2009.
Case in point, one of my property listings is a short sale. My lone short sale listing. Now, and hopefully forever. Over the four months it has taken our buyer’s offer to gain full approval, only to have a needed extension to the closing date entail another two week period of review and authorization from the banks involved, the twists and turns of this transaction have been nothing short of spectacular. Fortunately, with a closing now on the horizon, we finally appear to have this bit of transactional jello firmly nailed to the mesquite in my backyard.
Apparently a glutton for punishment, I currently have two buyers with offers accepted by sellers and submitted to their respective banks for approval on short sales. One of those buyers deploys for Iraq at the end of this month. We will be lucky to have a loss mitigator assigned to the transaction by the time his boots touch the 130 degree foreign sands. The other buyer is a first time homeowner who has been looking with me for several months. In both instances, we’ve only grudgingly included short sale listings recently in our lists of properties to see. The time factor is brutal, but it is the uncertainty that has been the primary deterrent. It’s one thing to wait indefinitely for a foregone happy conclusion, but quite another to invest a month or six of your life into a transaction that may be doomed from the start. As such, for many, short sale properties have really turned into the “just-in-casers.” Throwing an offer at a bank as a contingency plan, buyers are well advised to continue shopping for a property in which the seller is in a position to provide a quicker response. If a resale or bank-owned property pops up while the short sale is still in limbo, the buyer is free to cancel that transaction (provided a standard AAR short sale addendum is included with the standard verbiage) with no loss of earnest money and pursue the new candidate. Lots of additional work for all parties involved, but you’ve got to get your fingers dirty in the current market if your seeds are to take root and grow into an actual sale.
Then there are the bank properties. Foreclosures, REOS or whatever other term you know them by, they differ from short sales in that the bank has already taken the property back from the defaulting homeowner. No interminable wait while the bank assesses value and the seller’s qualification for a short sale, but there are still a few wiggly characteristics with these properties. For starters, while infinitely quicker, you can still forget about an immediate response or any loyalty to the author of the first offer. You can attach a two page cover sheet with your offer outlining your love of the home, how the drapes match your furniture and for the first time in your life, you feel like you have really found “home,” but the asset manager at the bank will still sit on it for 3-5 business days to see if anyone will beat it by twenty five cents. Even if you offer full price or above. Trust me … been there, done that. Further, because everyone wants bank owned pricing, these properties are often highly competitive. The banks know it. Given this truth, the very best values that you are holding out for as a buyer are highly competitive. If you’ve seen 100 properties and think the latest one is a screaming deal, so do the thirty other buyers who have been looking at the very same houses. That awesome deal you see on a bank-owned price is often just the floor for the higher offers that pile up like clowns in a circus car.
Wiggle, wiggle, wiggle.
Of course, if transactions involving banks are akin to manipulations with an amorphous edible substance, selling a typical resale home at present remains more like nailing a pickup truck to a tree. By and large, resale properties continue to be drastically overpriced. Only the savvy sellers who price to compete with the banks stand a chance of actually unloading their homes. No matter how strong the marketing nail or stout the trunk of seller resolve, gravity continues to win that lopsided struggle. You can only prop up an unrealistic price for so long before it finally crashes back down to market value or the broken down rig gets towed right off the market. No buyer is going to shimmy up that tree, get behind the wheel and drive said truck straight into the ground.
Is buying and selling Real Estate in 2009 a tricky business? Hell yes! Up is down, down is up, and nobody knows when this crazy ride will end. But just like raising kids, the process is uniquely rewarding. So grab a helmet, buckle up and don’t be afraid to enter the scrum. As long as you know what to expect and bring an experienced chaperon, you’ll eventually get where you want to go.
Even if you end up with a few stains on your shirt along the way.