Where is Austin's Housing Market Going?

Recently an Austin-American Statesman article about the Austin housing market and its relationship to the national state of housing has been making the rounds on social media. And I think it deserves more than a simple share and/or typical Realtor, “Buy or sell with me” comment. So let's dig into what that article has to say and what it really means for you in the coming years.

Recently Gary Keller gave a speech at the Keller Williams Mega Agent Camp a few weeks ago focusing on the future of the housing market in the US. He predicted a coming downturn and warned agents to prepare for this. I was in the room for this and was beyond impressed with his in depth research and analysis of the topic. Not only is he looking at current economic trends both nationally and internationally, he is considering historical market cycles and shifts. And I agree with him on this - we are definitely trending towards a downturn. 

I even wrote an in depth article about this very subject about a month ago titled, “Is it time to sell your Austin Investment Property?” The article is specific to real estate investors who tend to lead the market. My biggest concern is my investor clients getting over-leveraged in their real estate holdings, betting on the market, rather than truly investing in it. When the bubble burst in the housing market in 2007, because a lot of investors were over-leveraged with the rest of the overzealous homebuyers, the bust had a compound effect that could have easily been avoided with more conservative investing tactics.

What does the article say?

But if the national market slows down what does this mean for Austin? Let's take a look at what the article had to say. Shonda Novak, who’s work I’ve admired for years, has done an excellent job getting several top economists to give them predictions for our housing market. I want to tackle each one of their responses separately and dig into what they had to say and what my thoughts are on each of their answers. 

• Mark Sprague:

The most pointed comments were given by Mark Sprague of Independence Title. His acknowledgment of the housing market still being extremely hot, yet pricing increases have slowed down, is right on. However mark my words… it will continue to be a seller’s market for at least another 2-3 years. As Mark stated, the election will cause the market to slow for a short time. Once we settle into a new Presidency, the Austin market should settle back into it’s natural rhythm by Spring time with prices going up 3-5% per year, instead of the 8-12% of the past 3-4 years.

• Mike Castleman:

Mike Castleman’s point about jobs is the most important aspect of his diagnosis of our real estate market. “Because unemployment is so low, when we create a new job, we have to import that employee, and that creates a housing demand unit immediately,” I like the phrase, “import employees” because it is so true. If you want to be gainly employed in Austin, there is opportunity everywhere. Case in point, we are going to be hiring at least 2-4 people in the next 3-6 months. If you know anyone that wants to break into the real estate world - send them our way.

• Charles Heimsath:

The luxury market is always the first part of the market where we see a slow down. Most of the time this is because prices get so high, even the wealth start to shy away. Buyers aren’t able to “trade-up” into more expensive homes and their is just a much more limited buying pool at the top. This was the best part of Charle Heimath’s analysis. In looking at the luxury market in Austin ($1M or higher), there is currently 10+ months of housing inventory. For reference, the overall average of housing inventory is at 2.3 months. Historically, before the market began to improve in 2011, there was close to 64 months of luxury home inventory. Even though luxury home inventory is indicating that it might be more of a buyer’s market, there is still strong demand for homes that are priced right.

• Eldon Rude:  

Eldon Rude’s comments mainly focused on the strength of the job market. His observation that employment has increased by 28% in the last 6 years is eye-opening. As long as we continue to see job growth, the housing market should follow. And as stated above, the robust job market in Austin should shield us from most of a national downturn, should it occur. 

What does this mean for us?

It looks like the top of the market is starting to soften some. The election and other National and International economies might begin to slow down our market. But as long as we continue to have steady job growth, we will see steady that population growth and housing will follow for at least another 2-3 years, if not longer. Any further questions? Let me know and I'd be happy to sit down with you to talk it over!

MORE RESOURCES

Gary Keller’s Slides from Mega Camp

Further reading on the housing market both locally and nationally: MarketWatch

Aquila Commercial’s Q2 Market Report - In depth study of the Austin’s economy and how it relates to real estate

Using Real Estate To Build That College Fund

SAVING FOR COLLEGE WITH REAL ESTATE

Two months ago, my wife and I welcomed twin boys into the world. In the next few months, we’ll have their entire college education effectively paid for using proportionally very little of our own money. How? Through long term real estate investing.

Our goal is a lofty one: be able to pay for 100% of our children’s total college expenses. This amounts to roughly $215,000 per child for four years at a public, in-state school by 2037, when the twins will begin their final year of college. So, we’re anticipating needing roughly $430,000. That’s in addition to meeting our own retirement, investing, giving, and lifestyle goals. Daunting!

However, we have a plan—and a rather simple one at that:

1. Buy a single family home and rent it out.

2. Let our tenants pay down the mortgage over the next 18 years.

3. Sell or refinance the property.

4. Use the proceeds to pay for our twins’ college expenses (or whatever else).

But there’s much more to it.

First, we have to define the right property. How much house should we buy? The initial constraint is that we need to net at least $430,000 from the sale or refinance of the property by the time college rolls around. We know we’re unlikely to hit this number exactly, and coming in too low would be much worse than ending up better than we planned. So, we’re choosing to err by overshooting our target.

Suppose that the property we buy will appreciate on average 5% each year for the next 18 years—a figure I believe to be slightly on the conservative side for central Texas, the Austin area especially. With 20% down and 4.625% fixed for 30 years—typical for non-owner occupied mortgages from retail lenders—we’re looking for a home worth around $240,000.

With $468,656 in projected equity after 18 years using conservative mortgage terms, we will have room to choose between selling the property and refinancing when 18 years is up. Either way, we should come out at or above the $430,000 target. Note, also, that the numbers above do not take into account reinvesting future rental cash flow into improving the property making additional mortgage payments. Once we take that into account, things look even better.

Beyond the numbers, we want at least a 3/2 home in a good school district and strongly prefer a single-story with at least three-sides masonry. We’re also not particularly concerned with the investment generating meaningful cash flow in the near term. In fact, we’d be happy if we can come close to breaking even over the next few years. We don’t expect rental rates to fall on single family in the Austin area over the next 18 years. In fact, we expect meaningful cash flow over the longer term as rental rates continue to rise. This will help us accelerate mortgage pay down and build equity faster.

Second, there’s the matter of actually finding the property. Our time horizon is long on this particular investment. So, we’re not against purchasing a rental-ready home straight off of the MLS. However, who’s not up for a deal? In a future blog post, I will detail some strategies I (and other investors) use to source deals in this hot central Texas seller’s market. However, in the Austin area market, for the type of property we’re looking for (described above), we’re most likely going to have to buy it retail on the MLS or from builder inventory.

Third, we need to determine the best way to buy the property. In one way or another, we’ll need to get a mortgage. Mortgage loans can come from many sources: private individuals, banks, mortgage brokers, mortgage bankers, credit unions, etc. It makes sense to shop around heavily. However, for a 30-year non-owner occupied fixed rate mortgage from a retail lender, we’re looking at around 4.625%. Mortgage insurance doesn’t cover investment properties. So, we’ll need to put at least 20% down, which comes out $48,000.

I realize that $48,000 is a significant amount to most of us. Indeed, the down payment will most likely be the largest hurdle for most of you reading this. In a future post, I’ll outline sources of long term investment property financing that can require less than the usual 20-25% down for well-qualified borrowers. It’s also possible to tap equity in your primary residence via a HELOC to make a down payment. However, realize that, if you’re going to be saving for your child’s college anyway, you can put off the strategy I’m describing here in order to raise the funds needed for a down payment. Just be sure the money you’re putting aside is invested in a vehicle that will keep pace with inflation and provide some growth, such as a short-term bond mutual fund.

The upside is that, once we commit that down payment, we’re effectively done paying for our kids’ college. For the next 18 years, we’ll have other people (our tenants) paying toward our kids’ future education while the property appreciates in value.

Fourth, we’ll have to get the property leased and managed. For those with less experience or time, but especially if it’s the first time, it almost always pays to work with a REALTOR®. He or she will help prepare, price, and market the property, ensure compliance with the relevant local, state, and federal regulations, provide leasing and other paperwork, screen potential tenants, and negotiate on your behalf.  For these services, a REALTOR® typically requests compensation equal to one month’s rent. Fortunately, as an experienced REALTOR® and investor, I’m comfortable with all that goes into getting a property leased to a great tenant for top market rent in central Texas.

What about management? It is perfectly possible to manage one or a few single-family rental properties while maintaining a full-time job, as long as you have the temperament for it and the properties are within your immediate area. In fact, unless a property is a significant distance away, I don’t see any reason to have a single-family investment property professionally managed, unless you really are just too busy, uncomfortable being a landlord, or simply have too many properties to manage alone. Though nobody enjoys getting a call about a leaking water heater or a broken A/C in the middle of dinner, my wife and I enjoy even less someone else taking a cut of our rental income.

Finally, I’d like briefly to mention one unique benefit to this method of saving and paying for a child’s education on which it’s difficult to place a dollar value. As soon as my twins are old enough, which is sooner than you’d think, they will help me run every aspect of the property. I want them to really feel like it is their house, their tenant, their investment, and ultimately, their responsibility. They will need to learn to make and follow through with plans, interact with others, and work together to solve problems. This will provide me years of opportunities to teach financial and personal lessons and bond with my sons.

Though there are plenty of great ways to save for a child’s college (e.g., a 529 Savings Plan), my wife and I believe the real estate based strategy outlined above makes good financial sense. However, we are aware of the risks involved when compared to other options. I could give a list of pros and cons, but my goal here has been to describe what my wife and I plan to do, not argue that everyone should follow in our footsteps. However, I do think it’s something anyone facing the uphill battle to save for a child’s college expenses should consider seriously.  

If you’d like to discuss real estate as a way to save for college (or even retirement), reach out to me below or give me a call at (512) 991-4801x3.

RELEVANT RESOURCES:

College Savings Calculator // Home Equity Calculator

Tip, Tricks and Resources For Finding a Good Contractor!

3 Tips for Finding a Good Contractor

Before you ever get started on a new project around the house, my first recommendation is to consider the resale value of the project. Are you doing the project for you, for resale or both?

The average homeowner moves every 5-7 years. If you plan on never moving, go ahead and make a very personal choice on your updates. However if you think you might move again its important to consider the value a properly done remodel or renovation can add to the final sale price. Since I see so many homes, I’m happy to tell you what I think. We can also recommend architects and interior designers to provide some insight as well. We also recommend looking at the National Association Cost versus Value Report.

 

1.Get recomendations

Once you’ve decided on the project, start talking to anyone and everyone who’s taken on a similar project. They can usually recommend some trustworthy contractors. We also deal with a a lot of contractors as we help our sellers prepare for the market. Always consider us a resource for all things real estate. As a last resort, Angie’s List and Thumbtack are typically good resources. You can usually get a good idea of what a project will cost based on some of the bids you will get from these sites. Both sites are now FREE to use as well.

2. Interview multiple people

Next, you want to make sure an interview a few different contractors for any given project. I always like to let the contractors know that we are getting multiple bids so they will put their best foot forward. I also recommend this because timing can prove to be a challenge. Sometimes the contractor you want to work with won’t be available for 6 months and you need it done in 2 weeks. It’s also important that you have a good line of communication. Some projects can take several weeks or months and it’s important that you can get along with your contractor for that length of time. Along with all of this you want to make sure that you get along with your contractor and that they understand your vision for the project. Home renovations are always a big investment and good communication can make or break the project. 

3. Always negotiate

Lastly, once you decide on a contractor ask them one more time to give you their best price. It never hurts to ask and sometimes you can save a little bit more money on a project. It also helps to get to the bottom dollar in case you run into snags and have more expenses with the project than anticipated. I always recommend adding a 10-20% cushion into your budget to account for any issues that may come up. I also recommend paying your contractor after the job is done. Sometimes they will want money up front to cover costs, etc. If this is the case, break it into payments depending on the size and time the project requires. NEVER Pay a contractor in full up front. If any contractor is insistent that this is the only way they will work, get a new contractor.

In summary, think through your project and do your research. Ask friends or your favorite Realtor (hint, hint) who they recommend. Finally, push them to get to their best price, accounting for issues that may arise in your budget and never pay up front.

Top 3 Hardest Houseplants to Kill

Your Houseplant Guide

Who doesn’t love houseplants? That little bit of green can bring so much joy and a spark of life to a room. But, let’s be honest - we’ve all killed our fair share of shrubbery, so we’ve put together this list of the hardest houseplants to kill. Whether you have a green thumb or a brown thumb, we’ll help you bring just a little bit of the great outdoors inside your home.  

So in no particular order we present the 3 hardest houseplants to kill and how to care (or not care as it might be) for them.

1.Peace Lily

If you’re in the market for some great greenery that will also provide you with some floral love then look no farther than the Peace Lily. While not a true lily this beautiful botanical can still provide you with the fantastic flowers you need to brighten that room right up! What makes the Peace Lily such an easy plant to care for is that not only does it not require a lot of light or water - it will actually tell you when it needs to be watered with a telltale droop of its leaves. We recommend keeping it in shaded part of the house and watering it about once a week, making sure that the soil dries out completely between waterings. Otherwise just watch this beauty thrive and brighten up that space!

2.Snake plant:

    Up next we’ve got one of our personal favorites - the snake plant. Again this is another low light, low water plant, however the snake plant takes it a step further than that Peace Lily and is so resilient that it would take actual effort from you to kill. It can withstand a lot more abuse and neglect than most plants. The snake plant is great for almost any space because it can vary so greatly in size and can survive in either full sun or complete shade for long periods of time. We recommend watering it every 2-3 weeks, but be careful - it is easier to overwater this one rather than have it dry out to death. One important note is that the reason the snake plant can go so long without water is that it holds a lot of water in its leaves, this means that the larger they get the more they weight and heavier they get. Other than that this is one the easiest and most low maintenance plants you can get!

 

3. ZZ Plant

    Last but not least we have a newly discovered favorite of ours - the ZZ plant. We’ve saved the best for last here folks - as the ZZ plant is one of the hardest kill without a doubt. It got its start in planters in malls and large office buildings where people often saw them as fake plants because need such little care. Now that it’s starting to become a popular plant you can find them in nurseries and plant stores across the country. We highly recommend picking on up. They can survive in just about any lighting - even fluorescent, and as with the snake plant, you are more likely to kill it through overwatering than underwatering it.  We advise watering it only when the soil is absolutely dry or every couple of weeks just to be on the safe side. 

IMPORTANT: All 3 of these plants are toxic to humans and pets if ingested so stick to kale when it comes to your salad!

Where to Buy?

Now that you’ve got 3 great houseplant options that are incredibly difficult to kill its time to figure out where to get them. Well have no fear we’ve got our four favorite Austin nurseries and plant emporiums that will fulfill all your greenery needs and wishes. We love these places because they all have such an amazing staff that will be able to help answer any plant related questions you might have!

So get on out there and add some natural beauty to your home!

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Bartion Springs Nursery

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The Great Outdoors

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The Natural Gardener

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Tillery Street Plant Company

Top Ten Interview Questions You Should Ask A Real Estate Agent

Why Interview a Real Estate Agent?

For a lot of people, buying or selling a home is the largest monetary transaction they will make in their lifetime. Beyond a home being just a place of shelter, it's the place where family and friends gather and where our children grow up. It is also a savings account. In a lot of ways a home, when sold, can represent a large portion of many people’s retirement funds.

With the home buying or selling process representing such an important piece of many people's financial future, it is important to do you research when choosing a professional to represent you on something so large and important.

The good news is that 1,000’s of homes sell all over the country everyday. If done correctly, this can be a very smooth, seamless and rewarding experience. On the other hand, if handled improperly, it can make the process of selling your house a miserable and overwhelming experience. 

To better help you make a more informed decision when choosing a Realtor to help sell your home, it is important to take the time to interview them. We created a basic list of questions and why you should be asking these specific questions. These questions will pro-actively help you avoid the above issues. We've also included all the questions as a PDF that you can download and take with you when you go to interview a potential real estate agent. 

10 Questions To Ask When Interviewing A Realtor!

1. Tell me about your experience? How long have you been an agent in Austin?

I know this is a relevantly straight forward question, but the truth of the matter is, so few people we meet with ever ask. Without asking this question, you put yourself at risk to hire someone who, quite frankly, may not be qualified to advise you on such matters.

Experience is important for 2 reasons:

1. You only truly learn by doing. Passing a real estate exam, does little to nothing to educate someone on how this business works. There are hundreds of moving parts for every transaction and if you don’t know how the process works, it can cost your clients thousands.

2. The barrier to entry for someone to get a real estate license is about on par with learning how to properly swing a golf club. Anyone can get the general idea of how it should work, very few can drive a golf ball 300 yards down the middle of a fairway.

What does this mean in real estate terms? Is your Realtor up on national and international markets--both real estate and otherwise and how they will affect your bottom line. Do they understand how the timing of getting your home on the market can make the difference between selling at $400k or $425k? Can they tell you about supply and demand and how to properly take this into consideration when you are trying to come up with a price to sell you home.

Yes, we are in a sellers market. Most people think that means that all you have to do is put a sign in the yard, put the listing in the MLS and hold your hand out. People are leaving thousands of dollars on the table everyday by not hiring a Realtor with experience in both up markets and down. Worse, they are going to trust this massive transaction someone who probably won’t be in the business in 2 or 3 years.

2. Have you been through the home buying/home selling process yourself personally?

This is really important for 2 reasons… the first is financial stability. I don’t know how many times I’ve heard a potential client tell me they plan to work with their sister, cousin or friend to buy or sell their home because they want to “help them”. I always ask, aren’t they supposed to be helping you instead of the other way around. I’ll tell you right now, you are helping no one when you putting one of the largest transactions in your lifetime in the hands of someone who can’t help themselves. If your Realtor is going to put their financial gain above yours, that is a huge red flag. When you aren’t stable enough to put your clients first, you give bad advice and make poor decisions.

The other part of this question is about understanding how large a decision buying or selling a home truly is if you haven’t bought or sold a home yourself. Growing up in the real estate world I had my first experience buying and selling when I was 17.  My Dad and I flipped a home together; he had a client that really just needed to get rid of a home. It had been his Mother’s and she had really let it go. We got the home at a great price, then my Dad and I put together a budget, estimated our profit on the sell, and we setup a bank account to pay for the updates and repairs. Every few days I met with the contractors, wrote checks and kept up with their progress. Let me tell you, the responsibility of something so big...especially at 17, has stuck with me to this day. It was one of the greatest lessons of my life. Selling a house takes time, dedication, hard work, and willingness to do anything and everything to get it done. 

3. What exactly will you do to find buyers for my house/property? Do you have a system and plan for your listings?

Most Realtors do what we call the 3 P’s. They PUT a sign in the yard, PUT the home in the MLS and then they PRAY it sells. And in this market, it can sell a home. But typically, this approach leaves thousands of dollars on the table.

Ask your Realtor what they do “Pro-actively” to get your home sold. Do they have a written plan that they can present to you? More importantly, do they have systems in place to achieve that plan and track the results?

On the buyer side, with so much competition out there for the few homes that come on the market, what will your agent do to find you the home you’re looking for? What will they do beyond setting a search in the MLS and showing you homes as they come on the market?

In addition, when your dream home comes on the market, what will they do to ensure that your offer is accepted? What process do they go through to writing the perfect offer and present it in a manner that gets the offer accepted? Ask them how often they win when there are multiple offers, you’ll find that most Realtors don’t have a real answer. It’s like a batting average; if you don’t know how many hits you get versus how many times you strike out, how will you ever improve?

4. Are you a full time or part time agent?

Did you know that the average Realtor does less than 5 transactions per year? At a median price of $292,000 (the median price in Austin as of this writing) the average Realtor makes about $43,800 in gross commissions annually. That doesn’t seem like enough to live on and should beg the question: do you really want to hire someone who does real estate part time, or has another job or, worse, whose business is failing? I recommend you find someone who does at least 15-20 transactions a year. If they work with a team (and that’s even better for reasons I’ll get into later) make sure their team is doing about 15 per agent. Less than that and I would start to wonder “why?” What’s wrong with the way they do their business that they can’t do at least a couple of deals every month? Clearly someone doing less than a deal every month is doing this as a hobby and not a profession.

5. Are you an individual agent or do you have a team?

Hiring someone on a team, or that runs a team is preferable. Why? Because the number one complaint I hear from people about their last agent was that they didn’t communicate enough or that they somehow felt that their agent didn’t have time for them. You already know I’m recommending you hire someone who’s busy. I think you should want to find someone doing a lot of business, and unless they have a team, you run the risk that they won’t have time for you. Ask them who they have on their team and what their roles are. This varies widely and there’s not just one way this is supposed to look. What you want to know is that they have both the office staff to handle the paperwork and logistics of the transaction as well as other trained agents who can communicate and work with you should your agent not be available. Find out if the person you are interviewing will be working with you personally every step or do they have specialists to handle various aspect of the transaction. There are advantages and disadvantages either way, and the important thing is you are comfortable with how they do it. Find out if they have hours or days they don’t work. Some people don’t work after 6:00 or Sundays. Is that OK with you? Some people like their employees to be available nights and weekends and some people are less demanding. You’ll need to make find out how your agent and their team operates and decide what works for you and your needs. And unless you get this clear you run the risk of hiring someone whose style won’t work for you.

6. What parts of town are you most familiar with? How many homes have you sold in my neighborhood in the past year or two?

This is important because every part of town, every neighborhood has a different supply and demand and different reasons why people do or do not want to live there. Wouldn’t it be good to know that a home was built on an old landfill and soil tends to shift and cause foundation problems? (This is an actual neighborhood in Austin). School districts as well as specific schools play a huge part in coming up with a home value. Its important to have an agent who knows the knows that areas that you want to live in, someone who can guide you accurately when looking for your dream home. 

7. Do you have a marketing/advertising plan? Can you tell me about it?

It is important to have an actual written marketing plan with systems and processes behind it. How else will you hold your Realtor accountable to the actions they are supposed to be taking to ensure that your home sells and sells for top dollar. When a Realtor doesn't have a firm plan of action in hand for your house there is an large chance they will be leaving money on the table or be unable and unprepared to command the highest prices from the market.

8. Who answers your calls and shows my home if you’re not available?

Your Realtor can’t be everywhere at all times. It is crucial that they have a team that supports them to ensure that every showing happens and every question is answered. Harvard Business Review did a study and found that if a call is answered and/or returned within 5 minutes, that potential business is customer is 75% more likely to make an appointment. If your Realtor doesn’t have a team, it is important that they have some sort of back-up if they aren’t available. And it is important that they communicate this with you upfront!

9. Can you provide me the names and phone numbers of past clients as references?

Beyond having some testimonials, it is important that you have references that will speak to your Realtors competence and character. For all intents and purposes, this is a job interview and should be treated accordingly. Not only that, but as we have repeatedly discussed, selling your home is a huge undertaking and you need to be absolutely sure that you can trust your real estate agent beyond the shadow of a doubt. Reaching out to past clients can provide you with the assurance that your Realtor is integral and trustworthy. 

10. Why should I hire you over the other 12,000 agents in Austin?

Your Realtor should have a unique selling proposition. Something that they do very well that sets them apart. What’s their marketing plan look like? What is their negotiating style? How do they help advise you to pick the right offer if you do receive multiple offers on your home? Can you trust them - do they have an established reputation? You need to know what your agent can do for you that no one else can.