A fascinating trend from an economic perspective is the growing popularity among consumers to purchase a second home. Whether it is being used as a vacation cottage, it is rented out or is merely an alternative to one’s primary address, the purchase of a second home is typically viewed as a Status Good. Additionally, this trend runs exactly opposite to the Theory of Marginal Utility and it thus makes the discipline of Real Estate the great exception to the general rule.
In every society, from the Marxist to the Capitalist, there is a fairly sizeable minority class which always has a surplus of cash from income or an ability to borrow sufficient for its expenditure to have stimulative effects on the general economy. Whereas in past historical times this minority class consisted mainly of the royalty and the aristocracy, it now comprises something like 25 percent to 30 percent of the population of a developed country. Because the education system in advanced countries is as egalitarian and selective as it has ever been in history, and because the skill requirements of a modern advanced economy are higher than ever before, this minority class tends to be clearly divided from the remainder of the population in terms of intelligence, educational attainments and cultural tastes
With extra spendable resources at its disposal and a fairly higher degree of education, knowledge and experience, it comes to a point where this minority class focuses its energies and resources to the acquisition, holding, perusing, renting and reselling of consumer items which are out of reach of the remainder of the population at large. As such, these items have a distinctive connotation denoting a higher status within society - if none other than in the minds of the beholders, and are called Status Goods. A second or subsequent home is possibly the crown jewel of all consumer goods and the quintessential status symbol.
More specifically, a Status Good is a purchasable item which becomes fashionable enough to have an effect on consumer spending, sufficient to produce a significant boost to the general economy of a nation, or a region, or a culture. The main motivation driving its purchase and use is that of denoting high status in society. Because of its desirability the price of a Status Good is able to carry a high profit margin and thus new providers enter the scene quite quickly with competitively high prices. This explains the recent development of resorts areas throughout the world. Here in British Columbia, for example, Whistler is already a world renown ski resort and site of the 2010 Winter Olympics. The real estate development of Whistler and Blackcomb Mountain in this past decade has seen land prices multiply exponentially from an average of CAD $75,000 in 1995 for a standard residential lot to CAD $750,000 in 2005 for the same lot. Anyone who owns an interest in land in Whistler these days definitely fits the foregoing definition and profile of status consumer.
As stated before, the purchase of a second or subsequent home runs exactly opposite to the Theory of Marginal Utility. “Marginalism” is the economic line of thought that postulates the notion that what is most important for decision-making and to determine economic value is the marginal or last unit of consumption or production. For example, one automobile is very useful for getting around. An additional automobile might be useful in case the first is being repaired, or for spare parts, but it is not as useful as the first. A third automobile has even less utility than the first two. Given the price of cars, one would not expect many people to own three cars because the benefit they receive on the third car would be unlikely to exceed the price. In essence, “marginal utility” is the additional benefit that a consumer derives on an additional unit of a commodity output. Such additional output is said to have economic value if the additional benefit exceeds the price of the output. The concept grew out of attempts by 19th-century economists to explain the fundamental economic reality of price.
As it relates to real estate, therefore, the usefulness of a second or subsequent home should diminish and, in accordance to the Theory, so should its price, so that second or subsequent homes should not possess economic value and, thus, demand for them should be minimal to none. Clearly, this is not the case in that real estate is not viewed as a disposable commodity but, rather, it is perceived as an appreciation-generating vehicle - a real capital asset. As proven empirically, second homes as Status Goods are a vital component of consumerism, in that they stimulate demand and production and, thus, economic growth.
Luigi Frascati
Luigi Frascati is a Real Estate Agent based in Vancouver, British Columbia. He holds a Bachelor Degree in Economics and maintains a weblog entitled the Real Estate Chronicle at http://wwwrealestatechronicle.blogspot.com where you can find the full collection of his articles. Luigi is associated with the Sutton Group, the largest real estate organization in Canada, and is based with Sutton-Centre Realty in Burnaby, BC.
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Tags: economics, holding, home trends, investment, marginalism, real estate
Ugly houses can be great investments, but we don’t buy them. We understand that there are lots of valid ways to make money investing in real estate. Buying and rehabbing ugly houses is certainly a good one, but we’ve chosen a different strategy. Our strategy is to buy good homes that are ready, or nearly ready, to move in. It has worked well and generated consistent profit deal after deal.
Can’t imagine getting a good deal on an attractive house? Believe it or not, there are bargains to be found because nice houses do go into foreclosure, people do move, and people still need to sell fast for a lot of different reasons. Sure, not every house we buy is beautiful and has an immaculate lawn. But you would be surprised at how many “ready to sell” houses are available at below market prices.
Like anything else, it takes work and know-how to find good houses. Here are three good reasons to look for clean, attractive houses.
1. Rehab and marketing time is greatly minimized. In many cases, you can show the house even before you buy it. In fact, if a house is clean and ready to show, we insist that we be able to show it during the time between signing the contract and closing on the house.
We are closing on a house in Chattanooga, TN this month that we sold before we even bought it. How did we do that? The seller was motivated because they had already purchased another house. We actually put a contract on it with the contingency that we would have it sold before we bought it! Our system of selling almost all of our houses on lease-to-purchase contracts keeps our average marketing time down to a week or two, so the contract with contingency was still very attractive to the seller.
The house was ready to sell. We only spent about $500 to fix it up. We sold it through a lease-to-purchase contract before we bought it, and our profit is $14,400 on this deal.
2. There are few rehab surprises. In our experience, no matter how carefully you examine a house before you buy it, there are always unexpected expenses in the rehab phase. It’s just hard to foresee some things until you begin remodeling. Of course, we prefer to keep these surprises minimized. Nice houses with little or no rehab are great for minimizing the surprise.
Incidentally, this is a good reason to have a home professionally inspected before you buy it. It’s also a good reason to budget some contingency funds for houses that do require remodeling.
3. Free up your time. You may enjoy the rehab and remodeling, but the path to true wealth in real estate is in finding and making the deals. If you are buying nice clean houses, then your time is spent in the deal making, not in managing the remodel projects.
Because we’ve made the choice to buy attractive homes, our profit margins may not be as extraordinary as some rehab deals might appear. We don’t have any stories of buying a house for $35,000, investing $35,000 in rehab and then selling for $100,000+.
Instead, our path to wealth has been through buying nice homes from motivated sellers at below market prices. We sell these houses through lease-to-purchase, or “rent-to-own” contracts at market or slightly above market prices. Our profit is generally $15,000 to $20,000 per house and our marketing time is usually less than two weeks.
You can do the math and see that buying nice houses can be very profitable for an investor. In our case, we prefer to handle more deals with these consistent profit margins, than work through the added stress of ugly houses.
Blake Watson is an active real estate investor,author and coach with Lucky 7 Seminars, a real estate investment training company headquartered in Chattanooga, TN.
email: blake@lucky7seminars.com
website: http://www.lucky7seminars.com
Unbeknownst to 98% of working people, the 40 year plan is over. Statistics show that by age 65 less than 2% of Americans can truly retire in comfort without the help of family members or the government. The lackluster performance of the stock market over the past 6 years has dashed many people’s hopes of retiring early. It used to be that you could get a great education, get a great job and settle with a company by 25 years of age, keep your nose clean, work your way to the top, invest in your companies stock and by age 65 retire the company you sacrificed for will take care of your retirement and medical expenses for life.
For many now this is just wishful thinking and a pipe dream.
Today’s norms:
The harsh reality is: Corporate down-sizing (e.g. Gillette, Ford, and GM). Corporate bankruptcies - Enron, Worldcom). Company’s robbing company pension plans and judges are allowing it to happen just ask people working for the airlines, illegal insider stock trading, age discrimination, companies cannot afford to pay health insurance premiums because they have sky-rocketed and people are living longer.
Other forces: World Instability, unfettered nuclear proliferation, Sept 11th, natural disasters all cooked together.
Yes, the poor performance of the stock market, lower interest rates and the real estate boom have contributed greatly to people looking for alternative investment strategies such as self directed investing of retirement funds in real estate.
The Internet, information proliferation, people’s ability to share information, online financial software, and real time stock quotes.
Benefits of investing with self directed ira funds:
Stimulates the economy It is great for recession proofing an economy. Money from retirement funds keep construction crews working
With the ability to look outside the stock market, you may find alternative investment vehicles that are safer with higher returns which will allow you to make up for lost time.
Permits true retirement diversification and wealth accumulation in tangible assets.
Global investing With your self directed IRA, you can invest in international real estate.
Granted self directing your retirement portfolio is not for everyone. But what are your legitimate alternatives?
Joshua Geary is an avid writer, business strategist and online marketing consultant. For more information on how to turn your Self Directed IRA into a wealth building money magnet visit http://www.MyRealEstateIra.com
Tags: investing, investment, investments, pension, real estate, regulations, rules, self directed ira, wealth