Commodities are items of value and uniform quality produced in large quantities and sold in an open market. Although every residential real estate property is unique, these properties became uniformly desired by investors because all real estate prices rose during the Great Housing Bubble. The commoditization of real estate and the active, open-market trading it inspires caused houses to lose their identity as places to live and call home. Houses became tradable stucco boxes similar to baseball playing cards where buying and selling had nothing to do with possession and use and everything to do with making money in the transaction.
In a commodities or securities market, rallies unsupported by valuation measures fall back to fundamental values. It is very clear the rally in house prices was not caused by a rally in the fundamental valuation measures of rent or income. Many people forgot the primary purpose of a house is to provide shelter, something which can be obtained without ownership by renting. Ownership ceased to be about providing shelter and instead became a way to access one of the world’s largest and most highly leveraged commodity markets: residential real estate.
Commodities markets are notoriously volatile. In fact, this volatility is the primary draw of commodities trading. If market prices did not move significantly, traders would not be interested in the market, and liquidity would not be present. Without this liquidity, hedgers could not sell futures contracts and transfer their risk to other parties, and the whole market would cease to function. Commodities markets exist to transfer risk from a party that does not want it to a party who is willing to assume this risk for the potential to profit from it.
The commodities exchange controls the volatility of the market through the regulation of leverage. It is the exchange that sets the amount of a particular commodity that is controlled by a futures contract. They can raise or lower the amount of leverage to create a degree of volatility attractive to traders. If they create too much leverage, the accounts of traders can be wiped out by small market price movements. If they create too little leverage, traders lose interest.
The same principles of leverage that govern commodities markets also work to influence the behavior of speculators in residential real estate markets. If leverage is very low (large downpayments or low CLTV limits,) then speculators have to use large amounts of their own money to capture what become relatively small price movements. If leverage is very high (small downpayments or high CLTV limits,) then speculators do not have to put up much money to capture what become relatively large price movements.
The more leverage (debt) that can be applied to residential real estate, the greater the degree of speculative activity that market will see. Also, the smaller the amount of money required to speculate in a given market, the more people will be able to do so because more people will have the funds necessary to participate.
When lenders began to offer 100% financing, it was an open invitation to rampant speculation. This makes the return on investment infinite because no investment is required by the speculator, and it eliminates all barriers to entry to the speculative market. In a regulated commodities market, the trader is responsible for all losses in the account. In a mortgage market dominated by non-recourse purchase money mortgages, lenders end up assuming liability for losses in the speculative residential real estate market.
1. Do The Math BEFORE You Do The Deal
You absolutely must perform your due diligence when it comes to your purchase agreement. Check the comps (comparable homes) with more than one source. If you are working with a real estate agent, remember that while they have a code of ethics to live up to, they also have a vested interest in your purchase; so make sure to get accurate comps from other sources as well. I have seen wide variances in comps, especially in markets which have had high appreciation in recent years. Right now in Sacramento, for instance, many investors bought up homes like wildfire only to find the comps over $150,000 less than just 1 year ago! Over 15,000 homes for sale in the region and only a small fraction of that sold last month...what a nightmare for the seller! With the changes in today's market you don't want to get stuck with a home that is worth much less than you thought.
2. Don't Fall In Love
Treat fixing and flipping a house as a business and don't get too attached. You will spend less money and make better decisions when you are not emotionally involved with the details of a house. When it comes time to crunch the numbers, it doesn't matter if you love it or not. It doesn't even matter if you have the satisfaction of transforming a dump into a dream house; this is not your house and you shouldn't fix it like it's yours. I have heard so many new investors say they would only put the things that they would want in their own home. This is a tragic mistake that will over time, cost them big bucks. Get the highest quality your budget will allow but keep within your budget or you'll wonder what happened at the end of the deal. Remember that you are investing to make money. While there is a sense of satisfaction once a remodel is complete, if you don't make any money, or worse yet, lose money, all of your time and effort will be wasted. Not completely wasted because the learning experience is worth something, but we're not in this just for the learning experience. The whole point is to build your wealth through smart real estate investments, and the last thing you want to do is pay somebody to buy your house.
3. Another Pair Of Eyes
If you are creating your own plans for kitchens or other areas of construction, always have another pair of eyes view the plans with you onsite. This could be a business partner or friend, your contractor, or the vendor who is helping you with the particular area concerned. This could save thousands in fixing mistakes from wrong measurements or other flaws in a plan. The old contractor's adage rings true here, measure twice, cut once. Once a mistake is made, it's made and can be very costly to fix. Many times the repairs can involve several other trades.
4. Have a Life
Before taking on a project, large or small, evaluate your schedule, your time away from family and other responsibilities such as jobs, kid's activities, etc. This is critical to the success of your project and your sanity. Depending on the scope of work required and whether you planned to do most of the work yourself (or hire out), you will have an obligation to this project and need to stay on top of progress for profitability. Set a timeline that is realistic but monitor it on a regular basis. This is minding your business. Make the most of your time when you are out at the property. Get into good time management habits and make as few back and forth trips as possible. Having a life (jobs, kids, relationships, etc.) is one of the most important reasons that I suggest hiring out most, if not all, of the project. It brings balance back into your life. Overseeing is much different than doing all of the work and is much easier too. Just know that your family will thank you and so will your back.
5. Work with the right people
If you are using contractors, I HIGHLY suggest you get many quotes (more on this later). This process, while very time consuming, can give you great project ideas, time saving tips and reveal many cost saving plans. Ask lots of questions and make sure contractors are licensed and reputable. The worst thing that you could do is to hire an incompetent contractor who screws things up that you cannot fix yourself. Certainly, when it comes to items that will have to be inspected by the city, make sure they're done by someone other than the rookie contractor. I don't like to use side job labor for these either. In my opinion, it pays to spend more for the security of being able to go back to the business if/when something goes wrong. They should guarantee their work and if they don't, move on to another who will. One of the things you'll learn in dealing with contractors is that not all, but safe to say many, are flakey and unreliable. Don't rely too heavily on one. Get a Plan B or even a Plan C in place.
Getting many quotes initially will help in this process. If Plan A Contractor doesn't work out just call in B or C who already knows the scope of work, etc. Schedule to meet all contractors on one or two days and plan on getting stood up. I had a project in where I called dozens of contractors, actually made appointments with 30 contractors, had 10 show up, and received quotes from 3 and only 2 were written.
It's a long process to choose contractor backups, but if you do all of this while still in contract with the seller of the property, you still won't have any down time. You will absolutely have a better idea of what the project entails. When Contractor A flaked on the project, midway, I called in Contractor B who was already familiar with my project and picked up right where the first left off. They also like the idea of saving the day for you.
Both Alex Gwen Thomson & Michelle Rene Garcia are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Alex Gwen Thomson has sinced written about articles on various topics from Home Management, Income Tax Return and Wrinkles. is the author of The Great Housing Bubble: Why Did House Prices Fall?Learn more and get FREE eBooks at:. Alex Gwen Thomson's top article generates over 673000 views. to your Favourites.
Michelle Rene Garcia has sinced written about articles on various topics from Property Guide, Kitchen Home Improvement and Property Investment. Michelle Rene Garcia is the Founder of Real Estate Investing Roundtable, an investment training company that provides informational resources on a variety of topics for real estate investors looking to protect their wealth and make wise investment. Michelle Rene Garcia's top article generates over 3600 views. to your Favourites.