Housing Crisis Bad - people choose to sleep on lawns?

[sheehs1]

I disagree.

What it sold for at ANY time is mostly irrelevant. Why would the 2002 price be more relevant than the 2005 price, or either of those more relevant than some other random day (1993, or 1977)?

What matters is what NOI you can get from it... not what it sold for at some arbitrary point in time. Determining what it's worth has almost nothing to do with past sale prices, IMO.

To my way of thinking the 2002 to 2003 prices are relevant as a price point comparison...minus the escalation of prices during the bubble. The bubble is fake. So...you take it out. It does not mean...that prices can not fall further than this level...but for me anyway...it is one data point....at a point in time to include in any analysis.
One stands a better chance of making a successful real estate decision if one takes out the bubble prices. Why is this not relevant?

NOI is one calculation. Calculating positive cash flow including mortgage and interest is another. Using this calculation, one can determine at "which point" the property stands a good chance of breaking even with various levels of loan balances. One can determine the best ratio between cash down and loans to pull this off...etc.

 

[sheehs1]

Some of those vacation hotspot areas ballooned more than the average.

They did...sometimes more than 300% and 400%. Real estate agents told me prices were escalating 3% a month at that time. Over 12 months that was a 90% increase. Bubble last for several years..

Would rather let it continue to "shake down"...because I think it will. Others think the bottom has been seen in this particular resort area. I'm not so sure.

There may be some emotional buyers right now ...helping to put some support around it and in this particularly area there are. But IMHO, they are buying at 2004 to 2006 prices (based on what I got in 2004 for a part ownership beach cottage). Things were escalating even then....as you pointed out.

 

[BunsGettingFirm]

I know what I am about to trot out is OLD news, but I am surprised that the vacation home tangent has no numbers. Before I buy a property, I use the following simple spreadsheet. I can't copy a spreadsheet here, so I just included the row names. Basically gross potential rental income minus everything else down to maintenance gives you the NOI. Divide that by your required cap rate, then that's what the property is worth in turn-key condition. Cash flow I add back the maintenance reserve and the management fee if I am managing the unit myself.

Gross potential rental income
Estimate vacancy and collection loss per year
Insurance
Ad valorem taxes
Non ad valorem taxes
Utilities
Property management
Maintenance
------------------------
Net operating income
Cash flow

Required return 11%
NOI estimate value NOI/required_return

It is probably a lot easier to separate the emotional aspect when looking at cheap SFHs and condos that fulfill people's basic housing needs than to do so looking at vacation homes. Most of the ones I buy the most I'd say is, "OK, I don't think I would get shot living here." I certainly wouldn't jump up and down about the granite countertop (there is none) or the view (of the neighbor's backyard).

Looking at some of the properties, they are yielding 12% theoretically. The prices, however, are only back to where they were in 2001. I could hold out for 15%-20% cap rate, but there are enough other investors who are happy with 12% that a SFH in turn-key condition gets sold rather quickly.

 

[Gatordoc50]

They did...sometimes more than 300% and 400%. Real estate agents told me prices were escalating 3% a month at that time. Over 12 months that was a 90% increase. Bubble last for several years..

Would rather let it continue to "shake down"...because I think it will. Others think the bottom has been seen in this particular resort area. I'm not so sure.

There may be some emotional buyers right now ...helping to put some support around it and in this particularly area there are. But IMHO, they are buying at 2004 to 2006 prices (based on what I got in 2004 for a part ownership beach cottage). Things were escalating even then....as you pointed out.

During the bubble, rising tides lifted all boats. When looking at higher end properties, I look at the price multiples of various areas. Pre bubble, lower end SFH's were selling at 25% of waterfront in my area and about 3% of beachfront. That's about where we are now. The lower end has risen from the bottom and the higher end is settling in. Could drop further, don't know. In november I bought a 3000 sqft 2006 home on 2.72 acres for 220,000. The cost to reproduce would be over 500,000 conservatively. There isn't a like property on the mls right now under 350,000. We will see if that was a deal or not, right now it's looking good.

 

[jkern]

My Story

I too agree that Real Estate today is a good investment.

My story:

I live in the SF bay Area. I was a landlord from 1992 to 2004. Puchased property for 225K and sold for 635K. Had a net profit of approx 400K over 12 years (including rent, all exspenses and taxes). Had one tenant for 11 years and the second tenant for 1 year. Overall a pretty good expierence.

Now, I recently purchased two condo's in Roseville (100 miles away) at 65% off peak values. My net return (before taxes and maintenance) is approx 9%. The rental market is very strong and the condo's are less than 6 years old. With a little luck, I expect solid returns and low maintenance. My plan is to sell in 20 years or when the properties tripple in value, whichever comes first.

I purchased these properties with all cash. Today's cash returns of 1-2% is pushing me towards Real Estate.

 

[calmloki]

As it turns out we bought a house at an online real estate auction last year and moved in and spent the winter starting in November. We paid 75% of it's sale price when built new in 2003. A house identical on the outside to our new purchase sold on the open market in April 2011 for about 30% more than we paid. Our new house took some yardwork and paint and such - haven't bought a place yet that we didn't have a better idea than the prior owners about color or door swing or stamp our brand on it in some way. We brought lots of old rugs with us and bought all new (to us) furniture and such.

Utility costs could be lower because we are out of temperature extremes, but having two house utility bills makes them higher.

It costs money to drive 1100 miles one way to the second home.

It takes a few days to wake a house up.

Big positives for me? I bought the exact same memory foam mattress that feels great for both places. I've cooking gear, water pic, electric toothbrush and clothing ready for my use at both places. The rugs and art and furnishings in both places are of our choosing - not the Marriot's. I was walking around at dawn in my skivvies - or not - by the pool under a bright blue sky in February and sleeping cool in Oregon when it was 89 degrees at 11PM in La Quinta.

Are all decisions financially driven?

 

[BunsGettingFirm]

Are all decisions financially driven?

Damn it, Calmloki. You and Tryan are supposed to be the Yodas of investment properties. Please get back to our regular programming of spreadsheets and numbers. LOL.

 

[slingshot]

Not intending to hijack thread here but I have a question
What about buying a property for cash and then seller financing OAC at about 7%? Anybody doing this?

 

[kcowan]

...We're especially [-]cynical about[/-] sensitive to hyperbole like "secure".

and any claims that any class of investment never goes down!

 

[clifp]

Not intending to hijack thread here but I have a question
What about buying a property for cash and then seller financing OAC at about 7%? Anybody doing this?

I am also interested in something like this. My concern is that paying two sets of real estate transactions would really cut into your profit margin. How do you avoid that?

 

[arebelspy]

Not intending to hijack thread here but I have a question
What about buying a property for cash and then seller financing OAC at about 7%? Anybody doing this?

That'd be an interesting way to make some money in real estate without having to be a landlord, provided you can find a decent investor. May not bee to hard because of how tight the credit market is right now.

Should have a solid return if you researched into the area and the homes are undervalued versus their rents.

Not to mention you can sell not just to investors but to those looking to purchase for themselves but unable to qualify right now because of the strict standards (new couple with no credit, etc). Would have to weigh that risk carefully, and I'm not sure it has a ton of advantages vs REIT.

Got me thinking though, thanks.

 

[slingshot]

Quick confession...we sold some bare land this way 2 years ago as the folks trying to purchase were small biz owners and could not qualify for a traditional loan (as they have a good accountant and he makes sure they are not showing too much income so they don't pay too much in tax).
We have been getting checks like clockwork and they are due to refinance in 3 years, giving us a lump sum balance.
I don't wish to be overconfident-but I want to do this again!
Since my first foray was pure dumb luck, I'm looking for criticisms, critiques, the devils advocate folks who can point out the down side.
What about the future value of money calculation? How does that play in?

 

[sheehs1]

If you intend to keep an eye on it and it begins to look really good... alert the rest of us.

Don't know if I'm officially alerting you chinaco...but I did make an offer today. Price dropped 30K last week-end. Offered 73% below new list price..roughly at 50% of the 2005 tax assessment value (which is the so called "current assessment")....which we all know is not current.

Ran my own comps for current sales (as best I could), took note of what rental machines on ocean front were selling for. This property is on the sound...which we prefer.

Unique property on a unique piece of real estate with water views on 3 sides, Custom built in 2005 (not a salt box thrown up during the boom) Single family house on a cul de sac...easy access to everything,...$300/year HOA to maintain the common road (no monthly HOA fee)

Proven rental income for 2009 and 2010 (bank owned it in 20011 so could not be rented.) Income will just about pay for all expenses including mortgage and interest...(may have to kick in some...depending). 30% down ...may go to 46%.

Yearly rental income is 9.2% of the price I offered (rental income could go higher).

Bank owned....so it is likely they may reject the offer. I won't go much higher..if at all.....as it is not a good business decision ..at a certain price.

It is a place my husband and I could retire to ...if we wanted to in about 8 - 10 years.

 

[W2R]

Sounds like a lovely property, sheehs1. Good luck!

 

[BunsGettingFirm]

Anyone gave any thought to managing the business remotely especially those who are buying in las Vegas? Tryan tried it a while back and said that having a property manager really ate into his profits because the manager would call the plumber at the drop of a hat.

 

[haha]

Quick confession...we sold some bare land this way 2 years ago as the folks trying to purchase were small biz owners and could not qualify for a traditional loan (as they have a good accountant and he makes sure they are not showing too much income so they don't pay too much in tax).
We have been getting checks like clockwork and they are due to refinance in 3 years, giving us a lump sum balance.
I don't wish to be overconfident-but I want to do this again!
Since my first foray was pure dumb luck, I'm looking for criticisms, critiques, the devils advocate folks who can point out the down side.
What about the future value of money calculation? How does that play in?

You do have to know what you are doing. A guy sold the 10 acre lot behind me at my former address to someone who bought it with his corporation, a small down payment and a note with inadequate conditions.

So the buyer immediately punched in a road, logged the land of it's biggest asset- mature standing timber- and defaulted on all subsequent payments. The seller got his land back, but it was an unhloy mess, timber gone, and slash lying everywhere. To even minimally clean it up he stood to spend far more than he got in down payment.

I had made him a moderately low but real cash offer, which he refused. An inexperienced, but greedy man, so I was not too broken up about what happened.

Ha

 

[haha]

Don't know if I'm officially alerting you chinaco...but I did make an offer today. Price dropped 30K last week-end. Offered 73% below new list price..

Just to check- do you mean 73% of the new list price, or 73% below the new list price? The first would be $730K on a million dollar asking, the second would be $1 million-$730K, or $270K.

In any case, a trophy property that will also rent at break-even or better is a rare find.

Ha

 

[sheehs1]

Sounds like a lovely property, sheehs1. Good luck!

Thanks W2R2.....I think the bank is going to be a bit snooty about it...or so the word goes (so what else is new)

Truth of the matter is we've been thru this property 4 times. Once the bank got it, they turned off all electrical and HVAC systems....and created a mess on the bottom floor that has the garages and game room. MOLD was growing on walls, ceilings and in closets of the game room. The house was built in 2005 and is curable at a price. Monday my agent went in there and the bank was cleaning the mold, had turned on all systems.etc., and are down playing the mold. This was factored in with my offer because I was immediately going to replace the HVAC system that services that floor and all duct work ...as well as ...investigate sheet rock and insulation...and hire a good remediation company and take test samples on every floor including the attic. The way it is now, no bank will lend money against it if their appraiser finds one spore too many of mold. So we are thinking the bank is forcing a cash offer (which I'm not doing). It's been an interesting week and I've learned a lot. Until a formal inspection is done on the property and the mold denoted ....it does not become a "material fact". Once it becomes a "material fact", the listing company has to disclose the mold. So right now...am forming a back up plan...to maybe purchase a lot...and build. Don't know but am moving with caution. Thanks for your well wishes.

 

[sheehs1]

Just to check- do you mean 73% of the new list price, or 73% below the new list price? The first would be $730K on a million dollar asking, the second would be $1 million-$730K, or $270K.

In any case, a trophy property that will also rent at break-even or better is a rare find.

Ha

I wish it was the latter...but ...it is the former. Not quite at that level. Bank listed for $869 down from 1.3ish in 2009 (aren't they all). I offered $650K...due to the mold problem on bottom floor. Don't think they will accept. Built in 2005 4,750 square feet, 4 large master bedrooms each with their own bath and deck access, brazillian cherry floors, granite in kitchen...etc. and larger than we had wanted but loved the cedar shakes and decks and the design of the home. Also..has a real tiled pool and not those form pools most put it to satisfy renters pool requirement .

Without the ability of most being able to finance since a bank won't lend with a visible mold issue, and with true investors perhaps wanting beach front with more bedrooms, and few are going to pay "cash" (but someone might)...it could sit on the market longer. It's been on the market for over 900 days..already. It is probably the interior design. The main room...is 70 feet long..with no walls....kinda looks like a bowling alley with windows ...but I saw the possibilities of how to "warm it up" . Heck I could even put in a couple of fake walls if needed.or double sided book cases.
FYI...8 bedroom ocean front...bank owned.. just sold for $750K. So I thought my offer more than fair.

The lending company that owns this property......is in bankruptcy. All suggestions appreciated. We could have gone a bit higher on the offer...but ...I had calculated that at a certain point...it might not be a great business decision.

 

[Danmar]

Not really a fan of rental real estate. Did this in my 30's with some success but the work/hassle required of being a landlord put me off. Also very illiquid asset and a long time frame is probably the best approach. There was a study done in Canada that reached the conclusion that you get very similar returns with REITS as compared to owning directly. Much less work too.
Having said that, personal use property is something very different. Still considering getting an high-end place in Scottsdale. Love having our stuff/cars, etc at our places. Still not sure as this would be place #4 and would probably only use it for about 75 days a year. Prices sure look good though.

 

[kcowan]

Once it becomes a "material fact", the listing company has to disclose the mold. So right now...am forming a back up plan...to maybe purchase a lot...and build. Don't know but am moving with caution. Thanks for your well wishes.

Visible mold is just a sign that there will mold behind the drywall and getting rid of that is very expensive...there was a special about a women sensitive to mold who had to move out of her house (Slept in the RV in the driveway) until they discovered the mold growth behind her drywall. None of her family members were impacted.

 

[sheehs1]

Visible mold is just a sign that there will mold behind the drywall and getting rid of that is very expensive...there was a special about a women sensitive to mold who had to move out of her house (Slept in the RV in the driveway) until they discovered the mold growth behind her drywall. None of her family members were impacted.

Exactly right Kcowan...and is why I'm being as careful as I know how to be. Won't be upset if the bank laughs at my offer. Technically speaking...it isn't an offer and I've signed nothing. The bank only wanted letter from my lending bank with the terms of the offer before proceeding further...so...I have an out. The possibility of buying a lot and building just came up yesterday. Lots did not have for sale signs out...but there are 3 of interest that are available. I can possibly do this for about the same price...granted with less square footage but 4,750 square feet was larger than we wanted to begin with.
I'll tell you one thing. This can be stressful .but then I'm such a detail person it's probably me driving myself crazy making sure I have all the t's crossed and i's dotted before committing to anything.
The mold worried me...quite a bit actually...as my mom ultimately ended up with aspergillosus (sp) in her lungs..which contributed to her COPD.

 

[chinaco]

... I offered $650K...due to the mold problem on bottom floor. ...

Before I would risk any amount of money, I would get an expert to inspect and assess the property including (especially) the mold issue. For that matter, I would get an assessment before I took any further steps at all!

It is a buyer's market.... plenty of properties available. Why take any risk on known problems (that could be big... toxic black mold) and avoidable? It could affect the resale value or even your ability to resell it.

 

[sheehs1]

I agree chinaco. Been sort of interesting. The bank won't let you do anything until they have ratified a contract. They stated they will only allow 7 to 10 days for due diligence...which allows a buyer to walk if something is found. But since they want their list price...and since no lender is going to lend money unless the house is free of "defects,.... the bankrupted bank has set the stage for allowing only a cash offer at full list price. They had someone in there "cleaning" the mold off the walls on the bottom floor when my agent went in there on Tuesday. The mold is not evident now. We saw it when it was. Hope they are not trying to hide it from a buyer.

We aren't getting this property and are now looking at a lot...to maybe build. At least then, we'll know what is behind the walls...especially if we want to retire to it someday.

 

[W2R]

It is a buyer's market.... plenty of properties available. Why take any risk on known problems (that could be big... toxic black mold) and avoidable? It could affect the resale value or even your ability to resell it.

If my understanding is correct, you can't insure a home that has had mold until you can produce evidence that it was treated by a certified mold remediation expert.