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Real estate investment software

 
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admin
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Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Fri Dec 01, 2006 2:01 am GMT    Post subject: Real estate investment software Reply with quote

A long term goal for the Boston Bubble website is to provide software to analyze real estate investments and purchasing decisions. At this point, the software is just in the conceptual stage and there is no schedule for its development. However, I wanted to start a discussion on the subject in order to gauge interest and to see what others thought would be important for such software to do.

This is meant to be an open discussion of ideas to be freely shared. Please only post your own thoughts if you accept that they may be used freely by anybody, without restriction or obligation (e.g., the ideas could be used in a commercial product).

The current plan is to produce the software in distinct stages. The goal of the first stage is to aid users in determining whether to rent or buy their primary residence. The goal of the second stage is to aid users in determining how attractive of an investment specific properties are. There is a reasonable amount of overlap between the two stages, so the development should benefit from economies of scale. The reason for creating a rent-versus-buy calculator first is that a particular property should be able to pass the rent-versus-buy test as a prerequisite to being considered for an investment given the various factors that bias things in favor of buying and which only apply to a primary residence (e.g., all the government incentives which distort the market). Consequently, as prices continue to decline, the rent-versus-buy calculation will swing back to "buy" before investment makes sense again, and so the rent-versus-buy calculator is the more timely of the two stages.

There are already a large number of rent-versus-buy calculators on the web, so what is the motivation for creating a new one? I think there are two major drawbacks to all of the calculators that I've seen. First of all, they don't give much insight into the influence of all of the variables which go into making the decision. Secondly, they often have assumptions hardwired in which bias the result in a particular direction and which are not easy to change.

To address the first issue of the lack of insight into the individual variables, I would add a mini-report for each variable. In particular, the report would indicate how much the variable would have to change in order to change the end decision of whether to rent or buy. For example, say the end decision was to rent and that one of the variables that the user specified was that the duration of ownership would be 7 years. The mini-report for the duration of ownership might say that if the duration of ownership were extended to 20 years or more, then the decision would switch from renting to buying. There might even be a graph showing the difference in net worth between the two options versus duration of ownership in order to provide a visual context for how the current decision relates to the break even point.

The other issue of customizability is a broader problem and I'm still trying to work out in my head what would be most helpful. I think that each input should have a list of models that users can choose from in order to specify how the variable will behave. Each model will in turn have user specifiable parameters. For example, the user could specify that the duration of ownership variable could be modeled using a Poisson distribution with an expected value of 7 years. You could even have the capability to specify that a particular variable should have multiple models with varying weights - so for instance, you could give a 10% weight to a model based on what the National Association of Realtors says combined with a 90% weight given to a model that uses historical backtesting. Of course, in order to avoid overwhelming users, reasonable defaults will be chosen for all variables at the start so that an analysis can be made with no customization, if desired. The previously mentioned mini-reports for each variable will hopefully give some insight into which variables users might want to adjust the models for.

One typically inaccurate model that I would be particularly interested in improving upon would be a model for appreciation/depreciation versus time. Almost all the calculators I've seen have used a fixed annual appreciation rate for their model. I think that something more appropriate would be an appreciation rate that causes prices to regress to the mean with respect to the historical ratios of prices to incomes and prices to rents. It could alternatively also allow for movements above and below the mean for limited periods of time in order to mimic the cyclical trend which normally lasts roughly ten years. For example, the model could estimate that prices will fall to one standard deviation below the historical mean for the given ratios over the next five years and then rise to one standard deviation over the mean in the subsequent five years. This might be a better estimation of reality than a fixed annual rate, which is at best a crude approximation. (Incidentally, I also think that this principal would apply well to the investment software as well, as it could give an indication of the velocity of prices, rather than just the static snapshot you get with something like comps, which is what I think Zillow uses.)

Are there any thoughts or suggestions on the above?

For the variables involved, here is what I came up with off the top of my head for what might be worth including:

  • Cost of equivalent rental in similar location
  • Inflation
  • Income
  • Appreciation/depreciation
  • Mortgage rates
  • Marginal tax benefits
  • Down payment amount
  • Alternative investment returns (to calculate opportunity cost)
  • Property taxes
  • Maintenance
  • Condo fees (if applicable)
  • Insurance
  • Utilities
  • Realtor fees
  • Inspection fees, closing costs, and other transaction costs

All feedback is welcome and appreciated at any time over what will probably be an extended endeavor.

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PostPosted: Fri Dec 01, 2006 4:58 am GMT    Post subject: Reply with quote

Honestly, I think you're complicating things more than they need to be. From a buying perspective, all I would really want to do is have a webpage similar to a reality site, enter my search or mls# to see a house. Then the details for that house tell me if it's better to buy it or rent it and what a fair price for the house is. I wouldn't get into trying to predict anything, you'll end up wasting alot of time with algorithms that will never work in all scenarios. Also, it's better to make a tool to let other people do research to make predictions. In other words, if there was some way to tap into the MLS database and some other real estate data to get the details of the house and property tax, etc, then users wouldn't need to enter any numbers into a calculator.
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Mike



Joined: 01 Nov 2006
Posts: 28

PostPosted: Fri Dec 01, 2006 3:53 pm GMT    Post subject: Reply with quote

It seems to me that this software project would take a lot of time, especially if you're the only one working on it and it's not open-source. Would you be charging a hefty fee for this program (based on the demand), or would you be actively recruiting people from the forum to help w/this project and release it for free?
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john p



Joined: 10 Mar 2006
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PostPosted: Fri Dec 01, 2006 6:21 pm GMT    Post subject: software info Reply with quote

Mike, thank you.

I would say some of the benefits of software would be based on just the simple organization of information. Most of the people that might not see value in this sort of thing may already have enough knowledge to see how the parts all fit. The dialogue on this site is at a pretty high level so it's like asking MIT engineers if they need a math skills tool.

However, the potential value I see would be based on:

1. Understanding the decision between the benefit of locking in carrying costs i.e. having a fixed mortgage versus dealing with the potential for rental cost increases versus freeing up capital to be put to work for you, i.e. using savings from renting to be invested and grow. Then, weighing the risks of ownership repair costs versus the risk of the investment vehicle. Typical capital structure theory and risk analysis... For the tool, I wouldn't focus on the values to be plugged in, but the fields necessary to get a comprehensive understanding. Honestly, without sounding stupid, take a look at the Fantasy Football model. They provide support and data that you can pay extra for, and they organize the fields, but the final inputs are by the individual and the provider doesn't guarantee anything.

2. Understanding the items to be included in Monthly nut- month to month costs, what are locked in and what costs are variable. A renter might not know what to plug in for a projected water bill or home insurance cost. Just having a field to enter might trigger someone to ask about it and do some research. You'd be surprised that the cost of say parking in one location may be the difference in affordability, or another home heating costs or water bill. Some towns don't include services like trash pickup. Maybe you could punch in your zip code and see different oil companies that serve the area or see what types of local mortgage brokers there are available.

3. Understanding cash reserve management relative to risk. For instance an older fixer upper might require a greater amount of liquid assets to cover the unforeseeable. If a field for potential roof repair has an input for a higher risk level, maybe it spits out a higher number needed for cash on hand to deal with it. Further, if the monthly nut is a lower hurdle, extra available money can build cash reserves and offer more to investment vehicles. Maybe it can spit out what your projected financial position can be at different time horizons.

4. Identifying what the main factors are and how to mitigate and negotiate with an overall strategy i.e. playing chess using all the pieces in combination. For instance, for a first time buyer without a big down payment, PMI is a big deal. Are a piggyback loan for say 15% and a down payment for the other 5% a better strategy than shelling out the PMI? What if gas prices become a greater concern i.e. having to drive a long distance? If you can ride the commuter rail, you have one expense, but driving would mean you need a more expensive, reliable car and parking costs and car insurance come into play. Other issues are local costs of services i.e. day care costs in Wellesley are most likely more expensive than say Grafton, but by living so far from work are you able to get back to the day care on time? Again, most of these values are hard to determine and may seem silly to consider, but think about the mind (our internal computer) we need to wire all these thoughts together to find the optimal solution for our families. If a decent framework is outlined, the user can then imbed this diagrammed praxis or template and wire up their own circuits and fixtures.

5. Understanding "elasticity". This is very difficult to program but again, having the fields and having the interconnected understanding in ones mind then being able to feel the flow and the pulse of surrounding market. For instance, if interest rates go up, affordability goes down so the number of buyers available at a price point is fewer. The lower the price, the greater number of buyers is available. Further, whatever you're selling or buying, think about the disposition of the other person in the transaction. If you are selling a condo near the financial district, what type of buyer would be interested and how do you reach them. Think about how they get to work, where they will buy their food. Tailor your marketing to hit all the buttons that are in their minds electrical circuit board (hopes and fears) . Most people think about their own mind and their own needs, but don't think about the other person in the transaction. As far as the software is concerned, it may help to understand the profile of the person you are doing the transaction with. For instance, when I bought, I didn't need to sell something so I was able to figure out the maximum I could drop my price relative to another offer that had a contingency to sell their house. Further, the other dynamic in the mix was the timing. If a sales contingency is accepted in the early spring, it is less risky than accepting it later on in the summer where it may take the person longer to sell their house. It's all interconnected and wired. First you need to understand the framework, then spend some time and observe the activity within the framework and the timing. Ask the guy who knows how to find a parking space in Harvard Square how he learned.

6. This sounds corny, but the software could ask you to input what makes you happy. For instance, if someone likes to have 10 different Thai restaurants within a 5 mile radius, they might value one location different than someone that wants to hear the crickets at night. Sometimes understanding what you value can help you focus how you spend your assets and you get the most bangs for your buck. Also, think about the market segments, is it a growing trend for people to want the crickets or the Thai restarunts? It would be great if the software had links to communities that offered the amenities that matched up with what was valued. For instance, a buyer may not even be aware that a town or neighborhood offered something, or that there was an up and coming town or neighborhood.

7. Understanding the different chapters of your life. The software can also identify the typical housing needs that follow the typical trend of home buyers i.e. renting near the city and nightclubs, maybe a condo, and then whatever they want to settle down in. Maybe if rents are cheap and the stock market is hot, it may mean one thing for a 20 something. Maybe it demonstrates the demographics of population segments. I met a girl whose father bought a condo for her while she was attending college in Boston. Then after she graduated, the appreciation he gained after selling it covered her entire tuition costs. Granted, he hit it at the best 4 years possible in our Nations history... Transaction costs, so they need to be factored in, so sometimes it may be cheaper to stretch for a little time if you can tolerate the risk because you'll get further ahead in the long run by avoiding the transaction costs and risk embedded in the transaction of buying while having to sell. Think about where your salary will be at each chapter and if you want the flexibility to start your own company, and how perhaps would a real estate investment contribute or detract from that strategy.

Lastly, I would try to make the software kind of like a game. Make it fun to play like Fantasy Football. If some guys paid as much attention to buying a house as they did in deciding what golf clubs they want, the market might be less irrational. The ones that succeed will either be lucky or enjoy the work necessary to gain the insight.
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Location: Greater Boston

PostPosted: Tue Dec 05, 2006 2:18 am GMT    Post subject: Reply with quote

Thanks to everybody for all the great feedback. A full reply is forthcoming, but in the meantime I wanted to post this response that I received via email along with the accompanying spreadsheet:

Quote:


Hi Admin,

I cobbled this together for my own use. It's a little spreadsheet that
does a home purchase calculation and a home rental calculation and has
some nifty macros that help do some helpful comparisons.

Type ^r and it calculates the breakeven rent. (I.e., if you can rent for
this amount of less, it's more cost-effective than buying.)

Type ^p and it calculates the breakeven home cost (for a given rent, how
costly a home can you purchase and be better off than renting)

Type ^a and it calculates the breakeven appreciation (for a given rent
and home cost, what is the home appreciation that makes renting and
buying a toss-up)

It's also got some sensitivity analyses built in (see charts toward the
left side of the worksheet).

Any blue cells are assumptions that you can change. Other cells are
calculated.

It's a bit quirky, but feel free to play with it and do with it as you
will. Maybe it will give you some ideas for your software.

Best,
Sivan



Here is Sivan's spreadsheet, redistributed with permission: http://www.bostonbubble.com/sup/buying_worksheet_from_sivan.xls

It is an Excel file, but I had some success getting it to work in OpenOffice.org Calc as well. While the macros for the keyboard shortcuts did not work, they were pretty simple to reproduce by hand.

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