Readers who have been following this blog know that I’ve been diligently focused on building my dividend growth portfolio lately. I’ve been doing my best to save my bi-weekly paychecks, signing bonuses, ESPP, stock options, RSU’s, rental income, etc. to fund more and more purchases. The market has also been cooperating (for the most part), and many quality companies that I’ve been coveting have gone on sale. With that said, I’ve also been scoping out the real estate market in my spare time as well.
The Real Estate Game
When it comes to real estate investing, it isn’t as straight-forward to purchase. For one, it takes more than ten seconds to close a transaction (short sales can take 3-6 months). Further, unlike stocks, there aren’t one billion shares of the house you want. There is, and always will be just ONE! Each property is unique, and once it’s been sold, you may have to wait months, or even years for a similar model to become available.
Also, most folks don’t aim to purchase one, or two, or three properties in a given year. Most homeowners, in fact, spend many years diligently saving just to have enough for a single downpayment. In other words, it takes a herculean amount of effort to purchase “1 share” of real estate property. Since I just completed my first purchase in July of this year, why in the world am I still researching properties?
Why Keep Up?
There are numerous reasons to keep tracking the real estate market, even if you don’t have immediate intentions to buy.
- The best deals tend to pop up around November-February time frame. Most non-investors are finished shopping once the Fall season rolls around. With less competition, there’s more likelihood of an attractive property slipping under the radar.
- Short-sale properties are interesting propositions. They can take anywhere from 30 days to close, or in extreme cases, up to a year. Typically, a short-sale will close in 3-6 months. If you win, you generally only need to tie up 1% to 3% of the purchase price in a deposit to escrow. You can also let go of the property if you change your mind later (you’ll get your deposit back). I liken making a short-sale offer to buying a call option. In a bull market, you’ll be able to make an immediate profit since the property will be sold to you in 3-6 months well below the new market price. Unlike with call options, you will be refunded your premium (deposit) should you not exercise your option (back out of the short-sale agreement).
- Interest rates are still near historic lows. So, it’s a good time to buy and lock in this low rate. You should be able to easily obtain a 30 year fixed mortgage with interest rates below 3.5%
- Properties are still cheap. In most areas, they are still well below their peaks of 2006. For investors, we look for cash-flow positive properties. These can still be found, but who know’s for how much longer? The market has definitely picked up since bottoming out in late 2011 (Silicon Valley). If you miss this opportunity, who know’s when you’ll have another one? It doesn’t make sense to invest in a property if your rental income isn’t sufficient to cover the monthly payments.
- The laws of probability stipulate that you keep trying. “At first you don’t succeed…”
You Might Get Lucky
And quite frankly, you just never know if you’ll get lucky. I’ve put in about three or four offers since September. Each time, I made an offer on a property at/below market value. Since I don’t really have the cash on hand to complete the purchase for a regular sale, I am basically just throwing out darts blindly at short-sales, hoping to hit a bull’s eye.
Today, I might have accomplished that. I made an offer $45,000 below listing price, and surprisingly, it was accepted. The seller made counter-offers to all prospective buyers, and had a few demands for us to meet. Since my offer was so far below listing, I knew I had to oblige in order to have any sort of shot at winning.
I am now under contract, and will need to make a $3000 deposit into escrow. I will know in approximately 3-6 months whether or not the short-sale lender will approve the sale (fingers crossed). I am hoping for the best, but not sweating this one out! I will keep on investing in my dividend portfolio like I’ve been doing. The details pertaining to financing/downpayment will be sorted out if/when the appropriate time comes.
Here are the terms of the agreement: