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Q & A With America’s Real Estate Professor

By Leonard Baron

Shadow Inventory

Q. About six months ago I kept reading about all the “Shadow Inventory” that was going to hit the market, potentially dropping prices, and bringing to market lots of inventory for first-time buyers like myself. Sure doesn’t seem like that came true? Is this inventory still coming to the market? Tom L., Naples, FL.

A. I’m wondering myself where this entire inventory has gone. Shadow inventory is generally bank-owned properties not on the market, plus all the properties that were still owned by the borrowers and in default (or at least in trouble) that were not yet listed for sale. Millions of properties reportedly fit the shadow inventory category and every economist and pundit, including myself, felt these would drag the distressed property situation out for years.

How times have changed! Right now, as you allude to, there is a shortage of properties for sale and prices are rising. I can assure you that the big banks did own a lot of foreclosures and they still do own hundreds of thousands of units. They have been slow to list them for sale for a variety of reasons and who knows if or when that will change. There also were millions of people in financial distress on their houses and they probably still are in distress. But clearly those properties are not hitting the market. Part is due to banks being more willing to deal with existing homeowners and work out deals for them to save their homes; which of course hurts buyers, like you, who would like to own a home.

There has also been an influx of investors, plus equity fund investors, adding significant demand to the market and buying up available inventory. At this point, even if the shadow inventory is real and hits the market, the demand seems higher than ever and it will still be a fight for people like you to out-bid all the other people chasing properties.

Your best bet is to keep looking, make strong offers on properties that do come on the market, and be patient until you get a property you love into escrow so you can become a home owner. Good luck!

California Property Taxes Proposition 13

Q. I’m a real estate investor and recently read that California is a great place to buy property because property taxes do not rise very much. How does this work and what do you advise on investing there? Sandy C., Falls Church, VA

A. If your only criteria for buying property is the amount of property taxes you have to pay over the years, then California might be the place for you. Proposition 13 from 1978 generally limits property taxes in California to 1.0% of the purchase price plus up to 2% increase per year. So you have people who have owned properties for 50 years that only pay $1,000 in annual property taxes while their neighbors, with similar houses that were purchased recently, could be paying $5,000 or $7,000 per year in taxes. That probably is never going to change, and it is a big advantage to investing in the Golden State’s real estate.

However, there are many facets to a good real estate deal and in general California real estate is pretty pricey compared to the rents you can collect on any particular property. Plus there are all kinds of other costs due to regulation, insurance, maintenance and repairs, etc., that you need to consider in buying property. And the biggest issue I foresee would be the hassle factor of owning properties a long distance from your residence.

So for whatever property you want to purchase, you need to look at the entire cash flow, investment returns, and risk picture to find out what is the best deal. Once you educate yourself and determine the entire picture, you’ll be able to make a great decision…. but don’t make it just on the property taxes issue.

Leonard Baron, MBA, is America’s Real Estate Professor® - his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! Email your questions to: Leonard@ProfessorBaron.com

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