Al Lowry Insists a House Is Not Just a Home—It's a Way to Become Financially Secure
updated 07/16/1979 AT 01:00 AM EDT
•originally published 07/16/1979 AT 01:00 AM EDT
Why should people invest in real estate?
Traditional investments—insurance, stocks and bonds, savings and loan accounts—aren't working anymore. Not with inflation over 10 percent. The idea of saving your way to financial independence is baloney. Over the past five years, however, the average home has increased in value more than 50 percent.
What should a prospective homeowner look for?
An ugly duckling that can be treated cosmetically with paint, wallpaper and carpeting and turned into a beautiful swan. I've done this on many occasions. For example, the house next door to me was for sale for nine months. I bought it, spent $7,000 on minor repairs, shampooing the carpet, putting in better lighting fixtures and landscaping, and cleared $56,000 on the sale of that property a year later. I have a rule: For every dollar I spend on improvements, I look for a $2 to $5 return.
What should you do when buying a new house?
Before anything else, decide on the square footage you need and the neighborhood you want. Then look at a minimum of 20 houses in the area. This helps you evaluate what is available so you don't overpay.
How can you get the money for a large down payment?
Real estate people say you need 10 to 20 percent down. But in many cases the down payment can work against the seller's best interest. For example, to avoid paying a large capital gains tax, the seller may actually prefer an installment sale where the income is spread over many, many years. Or the seller may want to refinance the loan himself so he can dictate the terms.
Are there other ways to get around the down payment?
You can also avoid it when an owner sells the property under a contract of sale. He holds the contract for security. Maybe three years from the date of the contract, the deed can be transferred to the purchaser, who has built up enough equity meanwhile to qualify for a loan.
How do you find out what the seller really wants?
By calling him. If the real estate agent doesn't want to do this, the prospective buyer should. Most agents don't inquire into the real needs of the seller, like his tax situation or his need for cash. I find over and over that it's the people in between who cause a sale to go down the drain.
Why does this happen?
Well, 30 percent of all licensees who sell real estate drop out at the end of one year, and about 90 percent of those who do stay are not involved in anything but standard financing. They don't know how to get their commissions any other way.
What should you beware of in buying property?
When I buy or sell I always provide what I call a weasel clause in the agreement of purchase. This means the sale will proceed contingent on satisfactory financing, an inspection of the property by the buyer's contractor and on an acceptable bid for any needed work. Buying a house is exciting, but sometimes the person gets what I call buyer's remorse. The weasel clause allows him to back out gracefully. Real estate people hate me to say this.
What else should be in the contract?
In practically every contract I write when I buy, I put in that the seller guarantees all statements, representations and figures to be true and correct. It is surprising how many offers I make that come back with that part crossed out.
What is your advice on selling a home?
The average person calls one real estate agent who comes in with an eyeball figure that may be too high or too low. I've seen property sold which 60 days later is resold for tens of thousands of dollars more. The same rule applies to selling a house as to buying one: Know what you have. Go out and look at 15 to 20 for-sale properties. This allows you to average out a fair price. Then add another five to seven percent onto that fair market value, because everyone wants to negotiate.
Make sure your house is squeaky clean. That means down to fresh towels in the bathrooms. I've bought $500 worth of plants and put them around the house. People go for that. Another hint: Remove all the large pieces of furniture. That makes the rooms appear bigger. Be sure all the door handles work. Manicure the lawn. People want to be proud of the property they buy.
What about buying anew tract house?
Be sure you see a stripped-down model and not just one the interior decorators have fixed up.
What about investing in a vacation house?
I don't advocate buying a vacation home when you're starting out, if it is for investment and not for use. Vacation rentals are not overly successful. Generally they are too far away to be managed by the owner. And agents who rent them can take up to 25 percent and in some cases 50.
How can you dispose of property without paying taxes?
By trading or exchanging real estate instead of selling it. By structuring your transaction correctly you can make money and not pay taxes. I do it all the time, yet less than one percent of all real estate people know how to exchange property.
Why do you recommend that new investors buy improved property and not just raw land?
I prefer property which can become income-producing. Land has to appreciate a minimum of 20 percent a year in value just for the investor to break even. The majority of land does not appreciate even 10 percent. The danger is that it won't support the payments.
Where in the country are the real estate bargains?
From an overall standpoint, housing is less expensive in smaller communities—places like Grand Rapids, Mich. The South and Southeast look very, very good. There is brisk trading in places like Austin, Texas and Tampa, Fla., but prices are still far below most metropolitan areas. A woman who took my course bought a house in Lynn, Mass. with two bedrooms for $27,000 last year. People tell me they can't buy a house anywhere for less than $100,000.I say they can, but not in Beverly Hills.
How do property taxes affect demand?
States with excessive property taxes dampen the housing market. Around Boston, for example, taxes are very high. This keeps down the overall price of investment real estate.
Will a middle-income family be able to afford a house in the 1980s?
Yes. Financing can be tailored to the needs of the public. There is a new graduated mortgage plan which allows the buyer to make small payments the first year, then gradually increase them over the next five years. From then on the payments stabilize and remain the same for the rest of the mortgage. The federal government also makes loans available through the FHA and the VA. But the easiest way is still owner financing which benefits both the buyer and seller.
Will housing prices continue to skyrocket?
They will continue to increase because of inflation and demand, but we will have a leveling of prices in some areas where there has been heavy speculation—most of California, Philadelphia, Seattle, Chicago, Denver. This doesn't mean the bubble is bursting. It means, for example, a house that was worth $50,000 two years ago and $75,000 one year ago and $95,000 today will not jump to $120,000 a year from now, but it could be worth $105,000.
What are some of the pitfalls to avoid?
One major mistake is to make a decision to buy based mostly on the advice given by people trying to sell. Another is to offer to buy after looking at only two or three other properties. A third mistake is failing to study the neighborhood. Is it new and on the rise, or has it started to slide? Crime can be a very important factor. The local police can tell you what the situation is. But the biggest barrier to making money in real estate is inertia. Opportunities for small investors are everywhere. Make yourself get started!