Wednesday, September 20, 2017

The Crazy Seattle Housing Market


I just bet $20,000 that a house has nothing seriously wrong with it, based on nothing more than a 10 minute walk-though by myself and my wife. Although I enjoy going to Las Vegas, I’m not usually one to make such large bets. Seattle forced me to.

This Market Is So F-ing Crazy!

Housing markets vary across the country. In Arizona, when we sold our house a month ago, the market was fairly depressed. Prices had rebounded some from their all-time lows, but it was still considered a buyer’s market. There were more people looking to sell their homes than people wanting to buy one. This put downward pressure on prices, as any student of supply and demand can explain.

The Seattle area, on the other hand, is completely the opposite. Partly due to the many large tech companies headquartered here offering high paying jobs, many people are moving here and housing is scarce. There is not much un-developed land to build new houses on and what contractors are doing is buying up blocks of 5 to 10 existing houses, tearing them down, and building new ones in their place. Even existing homes are sold usually with a week. They could be sold in days, but most sellers wait for a week to get all offers and then choose the highest one. Basically, every home on the market is sold at a silent auction.

The New Home Process Turned Us Off

When my family first moved here, we were looked at buying a newly built home. New developments usually consisted of 10-20 homes or fewer. The builder would release the homes for sale one at time, usually at the rate of one every two or three weeks. If you wanted one of these houses, you needed to jump through a bunch of hoops. First, you had to apply for a loan using the builder’s lender. You didn’t have to end up using them, but you had to go through the whole pre-approval process with them, presumably so the builder knew you could afford to buy the house. Then, you had to get on an email list and be prepared to make an offer at a moment’s notice.  This is how the process works:

When a new home goes up for sale, people on the mailing list receive notice of the sale at 5 PM the day before. You then had to reply to the email with your offer before 9 AM the following day, telling the builder how much you will pay. The builder picks the highest offer.

Yes, the selling price is only a suggestion. The market is so crazy here, people are paying MORE than the asking price, even for new construction.

Did I mention most of these new houses don’t even have models built? You’re buying based on drawings.

If your offer was not accepted, you get to wait for the builder to release the next house. You can bet the next asking price will be $50,000 or more higher than the one for the last house you bid on, and that’s not counting how much people will bid over the asking price.

Used home sales are even crazier

If you want to buy a used home, you have the same general auction-like process. Most homes go up for sale and there is an open house the first weekend it is listed. The agent then collects all the offers for one week and, at the end of the week, the buyer selects the one they like the best. But for existing homes, there are some added twists.

In a normal market, a bid for a home usually includes a clause stating that you can get a home inspection and if the inspection turns up something wrong with the property that the seller refuses to correct, you can cancel the contract and get your deposit back. Not here. In order for your offer to be considered, you have to waive your right to cancel based on the inspection results. Or rather, you waive your right to get your earnest money deposit back if you cancel.

In a normal market, a bid for a home usually includes a clause stating that if you can’t obtain financing, you can cancel the contract and get your earnest money back. Not here. Don’t even bother considering to submit a bid unless you are pre-approved. Not pre-qualified. Pre-approved.

In a normal market, if the appraisal comes back lower than the sales price and your bank refuses to loan you more than the appraised price, you can cancel your contract. Not here. In order for your offer to be considered, you have to waive your right to cancel based on the appraisal. This means if your appraisal comes back $50,000 less than the sales price and your lender won’t let you borrow that extra $50,000, you have to come up with that $50,000 yourself. Or cancel the contract and forfeit your earnest money deposit.

In a normal market, an earnest money deposit is normally $1,000. It’s typically just a token, yet somewhat substantial, amount to indicate you are serious. When I sold my house in Arizona, the buyer put up $10,000 in earnest money, which I thought was a huge amount.  Up here, the typical earnest money deposit is $20,000 or more. Non-refundable upon contract acceptance. If the sellers accept your offer and you cancel for any reason, kiss that money goodbye.

Oh, and another thing. Your earnest money isn’t held until the sale is complete and escrow closes. For your offer to even be considered, you need to not only make the earnest money non-refundable, but also specify that it can be released to the seller within 5 days of contract acceptance.

And finally, your offer better include an escalation clause, or in layman’s terms, your silent auction clause. This clause says something to the effect of “we’re offering x dollars for your home, but we’ll actually pay up to y dollars if someone bids more than us and we will beat the other higher offer by z dollars.” Might was well shop for a house on eBay.

In this ultra-seller’s market, you basically give up all your rights to a refund of your sizeable earnest money deposit. And then you hope someone else doesn’t come in with an all-cash offer.

Our experience

When we heard about the crazy way new homes were being sold, we decided to ignore new homes altogether. The whole process just reeked of those Black Friday Christmas sales that start at 4 PM on Thanksgiving where people get trampled to death. The fact that each new home was priced at least $50,000 more than the last also turned us off.

http://www.dailymail.co.uk/news/article-2852585/Mayhem-Black-Friday-begins-Shoppers-clash-supermarkets-trying-grab-bargains-Boots-Game-Curry-s-PC-world-websites-crash-thousands-start-hunt-Christmas-deals.html

So we turned to used homes. We found one we liked priced at $600,000 that had just come on the market. We made an offer with all the “must-haves:”

  • A $15,000, non-refundable earnest money deposit. 
  • The money would be released to the sellers 5 days after escrow opened.
  • We offered $625,000 and stated we would beat any higher offers by $5,000 up to a maximum price of $685,000.
  • We waived our rights to an inspection and waived the financing contingency.
  • We also offered to let the sellers live in the house up to 3 months after closing, rent free, while their new house was finished being built.
  • At the advice of our agent, we also included a personal letter saying how much we loved the house and hoped to live there. Tugging at the ol’ heartstrings can’t hurt.

We thought that was a pretty solid offer. Nope.  We did not get the house. There were 19 offers total (after only being on the market 1 week).  Final sales price: $750,000

Yes, the house sold for $150,000 MORE than the asking price.

Crazy.

This market is unsustainable. A crash has to be coming.

The Part Where We Prevail

We were quite depressed after losing out on our first offer. Things looked bleak and I wasn’t sure how we were ever going to buy a place. A week or two later, another property came on the market that we liked. It was an older home, priced at $595,000 and smaller than the other homes we looked at.

We put in an offer and were hopeful for a variety of reasons. There were not a ton of people at the open house. The house also did not have some of the features most people seemed to look for in a house these days: The two guest bedrooms were a bit on the small side, so I figured it might not suit the needs of many people. Because our daughter will be heading off to college in 5 years, we felt we could make do with the smaller rooms. The master bathroom and closet were small. If we got the house, we were planning on remodeling those areas in time, so we’d live with it until then.

On the positive side, the kitchen was newly remodeled and pretty nice. The backyard was also very nice. It wasn’t huge, but it was tiered with nice gardens.

Our offer was:
  •  $620,000 and we’d beat higher offers by $5,000 up to a max of $663,000
  • We waive all the financing and inspections again. 
  • Our earnest money deposit was $20,000, non-refundable and available to the sellers after 5 days.
  • We also included another letter saying how much we loved the house.

The seller was accepting offers until Monday at 10 AM, when they would make a decision. My agent kept pestering the selling agent to gauge what the interest was. The Friday before offers were due, there had been none received. Wow. Our hopes rose.

We submitted our offer on Sunday and, at that point, there were still no other offers. This was looking good, although now I was starting to wonder if there was some fatal flaw others had seen that I had missed.

Ten AM Monday came and went without a word. At noon, my agent called theirs and was told there were a total of three offers and their agent was on her way to meet the sellers now to go over them. Their agent confided that she thought ours was the best offer.

Wow. Only three offers. I liked those odds.

Hours more went by, still with no word. It was not until around 5 PM that we finally heard back. We got the house! And at our initial offering price of $620,000! Their agent did say that the sellers liked our little note about the house. They were a couple in their 70s and I think they wanted to know their house would be going to a family that appreciated it.

As of this writing, we’re still in escrow and all is looking well. Once we own the house, we’ll get an inspection to see what all needs to be fixed. We’ll also re-carpet and paint and then move in.

It's Not Impossible. You Just Have To Be Different Than Everyone Else.

So there you have it. Even though this is a really tough market to buy a house in, we managed to get our second offer accepted. I think the secret was to be willing to accept a slightly non-typical house and try to make a personal connection to the seller. We still had to pay $30,000 over the asking price, but in the current environment, I’m fine with that.

Wednesday, September 6, 2017

Goal Update: End of August 2017

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of August, 2017
Current value: $33,865
Change from last month: +$1,583
Percent of Goal:  31.14%






Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.


Events Of Note Last Month:

I saw an increase of just over $1,500 this month. Net income from my online courses was $113.03. No new income from my ebooks, but I will have some next month.

Apart from my regular savings contributions, the only income in August came from my selling cash-backed naked puts, as I talked about two weeks ago. This trade is looking like it will turn out to be a good one. I sold 5 put contracts on Realty Income at 55, expiring Sept. 15. With less than 2 weeks before expiration, the stock is currently trading at 58. Assuming it stays over 55, it looks like I will be able to keep the premium I collected ($266.70) and repeat this process next month.

Relocation Update

My family and I are now officially Washington residents! My house in AZ sold and we are living in the Evergreen State. Last week, despite the crazy real estate market here, we found a house we liked and managed to get our offer accepted. This was no small feat! More details on that in an upcoming post. Suffice it to say that it is such a seller's market here, I had to do things I never would do in any other type of market.

We close escrow on our new house at the end of the month!

Net Worth Update 

Our net worth took a dive this month, at least according to Mint.com. We show a drop of $48,440! Yikes! But all is not doom and gloom. We put a $20,000 earnest money deposit on our new house. Because we don't actually own it yet, that property does not show up in the net worth calculations, but the drop in cash does. So we're really only down $28,440. Gee. I feel so much better.

Some of the rest of the drop can be explained by a couple of things. My 401(k) provider changed their website, so Mint can't yet get current data from it. It's about $2,000 below what it really is.

We also paid for half of our moving expenses in August. As I mentioned back in the February 2017 update, my wife got a relocation bonus and we're using that to pay for our move. Our net worth has been artificially inflated the past couple of months as we held on to that money. Now it's time to spend it, so our net worth will be dropping. We'll pay the second half of the moving costs after we get into our new house and the movers deliver our stuff. That should be sometime in October, if all goes as planned.






July 2017August 2017
Note: Mint.com categorizes our HELOC as a credit card debt, not a loan, hence the apparently high credit card balance. No more HELOC so I can finally get rid of this note!











Take a good look at that Loans figure - ZERO DOLLARS! It won't be that for another 30 years! Cash is also at an all time high due to the money we received from selling our Arizona house.

If you have any questions or suggestions for topics, please drop me a line in the comments section!

Wednesday, August 23, 2017

Option Writing For Passive Income


As I've written about in the past, my real estate partner doesn't have enough deals to invest in, so I've been looking for alternate places to put my funds to work. I was toying with the idea of investing in RealtyShares. I think this is a viable option for the future, but right now I need my funds to be a little bit more liquid. I'm looking to buy a house after our move to Washington. The funds I am investing are technically my Tesla funds, but the housing market is so crazy here, I may need to borrow from them, so I don't want to lock them up for an extended amount of time. (More on this is a later post.)

Enter Option Investing

I have already traded options for passive income in the past. What I did then was sell covered calls. When you sell a call, you are giving someone the right to buy the stock from you at a certain price within a certain amount of time. It's called covered because you already own the shares you have promised to sell. (If you didn't own them, it would be called a naked call.)

Selling Covered Calls

Covered call selling is about the safest way to use options to generate additional income from a stock. In return for agreeing to sell the stock to someone at a certain price, that someone pays you a fee, called the option premium. If the expiration date arrives and the stock is trading above the price you agreed to sell it at, the option buyer makes money because you have agreed to sell them the stock at a price below the current market value. You lose out on any additional gains above what you agreed to sell for. If the stock is trading below the agreed on option price, you get to keep the money the option buyer paid you and your stock (since it would be cheaper for the option buyer to buy the stock on the open market then from your agreed upon higher price).

Here's an example of a trade I actually made back in 2007 and wrote about on my old blog:

I sold 5 March 17 calls with a strike price of 55 for $1.25 per share per contract. One contract is good to buy 100 shares of stock, so I've sold someone the right to buy 500 shares of SFI from me at $55 per share on or before March 17. For this right, they paid me $625, or $1.25 per share times 500 shares. If the stock price on March 17 is below $55 per share, their contract is worthless (since they can buy the shares on the open market for less). If it is above $55, then they can exercise their contract and I must sell them the shares at $55 per share. But because they have already paid me $1.25 per share for the option, I actually make $56.25 per share.

Obviously, I hope the price on March 17 is below $55, but even if it isn't, I'm not worried. It can go up to $56.25 and I still won't be losing money.

In that case, the options expired out of the money (meaning at the option expiration date, the stock was under $55/share) and I was able to keep the premium I collected and did not have to sell the stock.

 Selling Naked Puts

A few months ago, I read a couple of posts over at Early Retirement Now where they talked about another strategy - selling naked puts. (I recommend you read their posts, as they go into much more detail than I will.)

In a nutshell, when you sell a put, you are agreeing to buy stock from someone at a specified price, even if the price on the open market is lower. For the person buying the put, this represents insurance against price drops. Even if the price drops to zero, they have a contract to sell it to someone at a higher price.

But for the person selling the put, i.e., the person guaranteeing to buy the stock at a certain price, this represents a potential loss. If the stock price does drop, they would have to buy the stock at the higher price. Why would you want this?

Well, as the folks over at Early Retirement Now point out, many mutual fund managers are highly risk averse and don't want to take any losses, so there is a big market for puts. If you can get a good price, the risk vs. reward ratio can be good enough to make this an attractive offer for the put seller.

There are some things the put seller can do to minimize the risk. Most importantly, keep the length of the option contract as short as possible. The folks at ERN trade futures options with an expiration date one week out. I don't have the funds required to do that, so I'm trading options on common stock with a one month expiration date. I'm also only selling puts on stocks I am willing to own and hold. In my case, this means Realty Income, my favorite REIT.

By the way, if you want to sell puts and you have the cash to cover any purchase you might be forced to make, you should ask for your brokerage account to be approved for cash-backed naked put selling. This is one of the option trading levels available at most brokerages.

My Trade

I made a spreadsheet to make the calculations easier. Here's a screenshot:

Click to enlarge

What I am really trying to do is get a certain rate of return. In most investments, you calculate the rate of return by taking the income or profit received divided by the amount of money you invested, then converting that percentage to a yearly percentage figure. But when you sell a naked put, this formula can't be used.

Why? Because I really haven't invested any money! I simply received money in exchange for promising to buy stock from someone at a certain price. I have incurred no out of pocket expense. You can't divide by zero, so how do you calculate the rate of return in this case?

I did some research and there are a couple different methods people use, but the one I settled on is this: you treat the money you would be forced to spend to buy the stock at the specified price as your investment.

So, looking at the spreadsheet above, the cells highlighted in green indicate the cash I would need to spend if my puts were called (i.e., if I was forced to buy the stock at the option strike price).

With that definition out of the way, we can go over the rest of the spreadsheet. The first couple of cells show the date of the trade, the expiration date of the option contract, and how far away that is in days and years. I also enter the current stock price, the total amount of cash I have in my account, and how many option contracts I want to sell. (One contract controls 100 shares of stock.)

The cells in the next column contain commission data and the dividend data of the underlying stock, used in calculations later.

The bottom rows of cells is where the calculations are performed. I enter two strike prices and the price those puts are selling for. The next column, net stock cost if called, gives me the net price per share I would pay, taking into account the option premium I receive. In the case of the 55 put, I was paid a $0.55 per share premium, so if my put was called and I had to buy, I would actually only be paying $54.45 per share ($55 - $0.55).

The Net Income cell shows my how much cash I get from selling the number of contracts specified above (5) minus the various commissions and fees.

The two yield columns tell me what my rate of return is. This is calculated using the cash needed if called figures (green cells) and the time until expiration fields. One value is straight percentage and the other is an annualized return (per annum, or p.a.).

The two fields for stock dividend yield don't play much of a role in my decision to sell a put, but are more for informational purposes. They calculate the dividend yield of the stock at the strike price and at the strike price taking into account the premium I received from selling the put. As I said, I'm only doing this with stocks I would be happy to own, so I like to see what my dividend yield would be if my option is called and I had to buy the stock.

My Criteria

In order for me to sell a put, I'm looking for an annualized return of at least 8%. As you can see above, the 55 put meets this criteria. In fact, this spreadsheet shows an actual trade I made.

As long as Realty Income stock is trading above $55 on September 15, I get to keep the $266.70 I received for selling the put and I don't have to buy any stock. Then I can sell another put the following month.

I'll keep you posted on how this turns out.

Wednesday, August 9, 2017

Credit Cards For People With Bad Credit


I'm not one who plays close attention to credit card offers or constantly applies for new cards to get the sign up bonuses. I tend to find a few cards that provide good rewards for my needs and stick with those. There are many websites devoted to tracking credit card offers and rate and promos. NerdWallet in particular does a yearly roundup of such deals.

The cards with the best offers or bonus tend to be mainly for people with good credit. What do you do if your credit is not so good or even outright bad? For those people, finding a credit card is less about finding one that provides good perks, but more about finding one at all or one without a crazy high interest rate.

A Great Credit Card Guide

U.S. News & World Report has recently published what is the most comprehensive guide for credit cards for people with poor credit that I have seen. You can check it out here. It's a lengthy read, but full of good information, especially if you have poor credit and are looking for advice on how to improve it.

The article starts at the beginning, defining what a credit score is, how to get yours, and how to improve it. It then moves on to specific credit cards to look at and compare. What I really like is the article also lists what credit cards to avoid.

If you have poor credit and are looking for ways to change that, this article is well worth the time it takes to read and study.

New Credit Card Offer

Despite having started this post saying I don't follow credit card offers too closely, I will say I received an announcement for one that made me sit up and take notice. USAA has come out with a new card that offers either 1.5% cash back on all purchases or 2.5% cash back on all purchases. This caught my eye because most cash back card will give you 2% back on all purchases, sometime up to 5% from specific stores that change each quarter. That extra 0.5% could add up! (Note: The higher return requires a checking account with direct deposit at USAA.)


Not everyone will qualify for this. Besides the regular credit card approval process, you also have to be eligible to join USAA. This generally means you or someone in your family must have been in the military at some point. Full eligibility details can be found here.

I use USAA for insurance and some banking. They are a great company with fantastic customer service. *

Thoughts?


So what do you think? Do you have poor credit? If so, what are you doing, if anything, to improve it?


* Although I have not received any compensation for anything mentioned in this post, please see my disclosure statement for full details.