Imagine you’re the proud owner of a modest 50-year old, four-bedroom, two-bath home … less than 2,000 square feet.
You put it on the market and it sells FAST … for $728,000 MORE than the asking price!!!
That’s not the sales price … just the premium OVER what you listed it for!
You might think this happened in that mythical marketplace … Fantasyland … but according this report, it just happened in Sunnyvale, California.
This average home was listed at $1,688,000 … which is RIDICULOUS in and of itself … but the actual sales price was a WHOPPING $2,470,000!!!
WOW. Equity happened BIG TIME for that lucky owner!
But HOW? And more importantly, what does it mean … and is there a way to get in on the action?
Let’s break it down …
First, equity is always about the right mix of supply, demand, and capacity to pay.
When there’s too little of something that lots of people can afford to pay more for … prices get bid UP.
In this case, the San Francisco Bay Area has next-to-no capacity to increase the supply of homes.
There’s an ocean, a bay, mountains, a green belt … and most of the available land has already been developed … or can’t be.Next, there’s a robust tech industry, great weather, and other attractions bringing an influx of immigrants from around the country and around the world.
Next, there’s a robust tech industry, great weather, and other attractions bringing an influx of immigrants from around the country and around the world.
So there’s lots of demand for housing relative to supply.But … $2.4 million for a run-of-the-mill house in an average neighborhood … bid up to $728,000 over asking price???
But … $2.4 million for a run-of-the-mill house in an average neighborhood … bid up to $728,000 over asking price???
That’s ALL about “capacity to pay” … and not from cheap mortgages.
No home lender is going to finance a mortgage on a home for $728,000 above asking price … no matter HOW great your credit score is.
So this huge overbid didn’t happen because some high-tech earner levered a fat paycheck into a fatter mortgage payment into an obese mortgage.
Without knowing the details of the transaction, we think it’s a safe bet this was a CASH purchase. But that doesn’t mean cheap debt wasn’t involved.
Here’s how the Fed, tech, the stock market, and real estate all intersect …
It’s no secret the stock market has been on an epic bull run for quite some time. It’s a bubble that just keeps inflating.
Inside the stock bubble are the FAANGs … Facebook, Amazon, Apple, Netflix, Google … the tech sector.
These have been the horses pulling the stock market higher and higher.
Another part of the story is the long-term crazy low interest rates provided by the Fed.
Big corporations (like the FAANGS) then borrow cheap money to buy back their stocks … pushing up stock prices (and executive bonuses).
Of course, if you’re a compulsive-obsessive financial news watcher like we are, we’re not telling you anything you don’t already know … but stick with us …
Because what many people outside the tech industry aren’t aware of is a very common compensation incentive tech companies offer employees … called stock options.
Simply stated, a tech worker takes a slightly lesser salary, which aids cash flow for a start-up, while accepting options to purchase the company’s stock at a future date at a fixed price.
The employee is now motivated to work hard and stay long to drive the company to profitability … and a higher stock price.
When those options eventually vest, they’re what options traders call “in the money”.
In some cases, it’s a LOT of money.
Long-term Silicon Valley residents are accustomed to spurts of fast real estate equity caused when a booming stock market creates tech stock-option millionaires … and fuels bidding wars for scarce housing.
Of course, you don’t have to be in the tech industry or have stock options to be the beneficiary of explosive real estate equity.
You just need to be in the right market.
After all, what do you think the home next door to this $2.47 million property is now worth?
Of course, all this is intellectually interesting … but is there real world opportunity here for real estate investors?
We think so.
Way back in 2012, Forbes put out a list of top tech cities. Among them were Seattle, Washington DC, and San Jose.
Today, with the benefit of hindsight, we know those markets have all seen substantial appreciation.
But there were other markets on the list, which didn’t have the same pop. So simply being a tech town isn’t enough.
Take a look at the list, then go back to our initial set of required conditions … low supply, high demand, strong capacity to pay.
Not all those places have a supply problem. It’s tight supply, high demand caused by population growth, and capacity to pay … a lot … through high pay and stock options.
Here’s a 2017 list of top tech hubs for you to peruse. You’ll see some familiar names at the top of the list.
But here’s something to think about …
Several top-of-list cities have become so expensive, tech companies are looking for new, more affordable places to move.
So cities lower on the list could be the beneficiaries of migrating and expanding companies.
Your mission (and ours) is to identify those “goldilocks” markets where the conditions are “just right” …
The market needs to be affordable today … and make sense on a cash flow basis, because if the rest doesn’t happen, we need to be able to hold the property long term and grow equity the old fashioned way.
The market needs some limitation to supply expansion, which will manifest in bidding wars, as tech wealth provides capacity to pay beyond easy mortgages.
There needs to be a solid combination of established tech companies and start-ups.
That’s where competition for talent forces small companies to offer options, which the bigger companies then need to respond to.
There are a few markets on this list that we have our eyes on … and some we’ve already developed relationships with. So stay tuned for updates.
Meanwhile, do your own homework. As much as we love cash flow, sometimes a big shot of equity can just brighten your whole day … and portfolio.
Until next time … good investing!
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