So, You Want To Be a Real Estate Investor…

Monday, 13 May, 2013 09:08 Written by Lane Bailey

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I had a call recently from a “would-be” real estate investor. He wanted me to find a few properties for him to flip. He’s been looking at the Atlanta market for a few years (his words) and decided that now was the time to jump in and flip some properties.

Atlanta (Photo credit: Lima Pix)

Specifically, he was looking for entry level homes that he could pick up needing a little work, maybe in the $50-75k range, needing $10-15k worth of renovation. His goal was then to sell them for $100-$125k. East peasy.

Except, it isn’t…

In fact, right now that would be ANYTHING except easy peasy. It would be quite difficult. And here’s why…

A few Billion Dollars in “hedge fund money” floating around the Atlanta market
A market turn that while not “complete”, is far from unnoticed.
A limited inventory, especially on the entry level end.
Lack of easily available financing.

Billion Dollar Car (Photo credit: soul_motor)

This was a guy without a load of cash, unable to offer quicker closes than “the next guy”, and unable to out-spend the competition. He was not only convinced that there was a glut of homes, but that he was completely in the driver’s seat on these types of deals.

That is NOT the case. In fact, small investors are regularly SHOCKED at what the hedge funds are paying for houses right now. They are bidding them up on the open market. They are bidding them up on the Courthouse steps. They are willing to pay top dollar whenever and where ever they find them.

They don’t care what they can sell them for right now. They are looking at 5 year turns… with rental income in the mean time. The “over-payment” will be erased by the rental income and the increase in values over the next few years.

If you want to compete right now, THAT is what you have to compete with. A few years ago, you might have been able to pick up a cheap property and flip it… not so much any more.

So, You Want To Be a Real Estate Investor…

Monday, 13 May, 2013 09:08 Written by Lane Bailey

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Pin It

I had a call recently from a “would-be” real estate investor. He wanted me to find a few properties for him to flip. He’s been looking at the Atlanta market for a few years (his words) and decided that now was the time to jump in and flip some properties.

Atlanta (Photo credit: Lima Pix)

Specifically, he was looking for entry level homes that he could pick up needing a little work, maybe in the $50-75k range, needing $10-15k worth of renovation. His goal was then to sell them for $100-$125k. East peasy.

Except, it isn’t…

In fact, right now that would be ANYTHING except easy peasy. It would be quite difficult. And here’s why…

A few Billion Dollars in “hedge fund money” floating around the Atlanta market
A market turn that while not “complete”, is far from unnoticed.
A limited inventory, especially on the entry level end.
Lack of easily available financing.

Billion Dollar Car (Photo credit: soul_motor)

This was a guy without a load of cash, unable to offer quicker closes than “the next guy”, and unable to out-spend the competition. He was not only convinced that there was a glut of homes, but that he was completely in the driver’s seat on these types of deals.

That is NOT the case. In fact, small investors are regularly SHOCKED at what the hedge funds are paying for houses right now. They are bidding them up on the open market. They are bidding them up on the Courthouse steps. They are willing to pay top dollar whenever and where ever they find them.

They don’t care what they can sell them for right now. They are looking at 5 year turns… with rental income in the mean time. The “over-payment” will be erased by the rental income and the increase in values over the next few years.

If you want to compete right now, THAT is what you have to compete with. A few years ago, you might have been able to pick up a cheap property and flip it… not so much any more.

Atlanta Home Prices up 40% From Last Year?

Wednesday, 24 April, 2013 10:41 Written by Lane Bailey

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According to the AJC, Metro Atlanta home prices shot up an amazing 40% between March, 2012 and March, 2013. This is looking at the median prices for “metro Atlanta”. Unfortunately, they don’t give us a breakdown…

But, I am going to tell you that the news isn’t quite that rosy. And here’s why:

Licensing (Photo credit: Wikipedia)

This looks at the median value of properties that closed during each time period (March, 2012 and March, 2013). It doesn’t look at neighborhoods, zip codes or cities. This becomes a problem with what I call “market creep”.

Last year, we were seeing a LOT of investor sales. Many of these were foreclosed properties, being unloaded by banks, at firesale prices. Not only that, but they were VERY often at the extreme low end of the market. These are houses that in a strong market might sell for under $60k or $70k. Granted, their prices were SUPER cheap… sometimes as low as $25k or $30k. But, they were insufficient numbers as to push down the overall market.

*** A quick note about “median” and “average”*** Many people use one or the other, sometimes as if they were interchangeable, but they are quite different.

Average is derived by adding everything up and dividing it by how many there were to add up. So, if you had $1, $2, $10, $37 and $100, it would add up to $150. Divide that by 5, and the average would by $30.

Median is derived by looking at the middle value. With our numbers above, half are above $10, half below. The median would be $10.

This year, we are seeing more expensive homes going on the market. Also, they are less frequently foreclosures or short sales. So, the “normal” listing prices are higher. In effect, houses could be selling for similar prices, but the mix could have changed.

Map of Georgia highlighting Gwinnett County (Photo credit: Wikipedia)

Going back to our previous numbers…

This time we had sales of $25, $26, $30, $34 and $35. Our average sale is still $30, but our median sale has now also jumped up to $30.

The sales aren’t really comparable to the previous group, but, it appears that there has been a HUGE increase in the median value. In real estate, these exact numbers aren’t realistic, but the concept is still true.

Here in Gwinnett, we have seen a solid 10% appreciation over the last year. There are pockets where it could be argued higher, and others where it is lower, but 10% is a defensible increase.

In order to REALLY get to the bottom of it, we have to look at subdivisions, and maybe even sections of a subdivision (in the case of the larger ones). Even then, we need to make adjustments for condition and even intangible changes (distressed v non-distressed sales).

The bottom line is that there are VERY few home owners that have seen their properties appreciate even close to 40% in the last year. But there is a reasonable chance that they have seen 10% appreciation.

Going after statistics with a shotgun, like this article did, seeks to erase the differences with a large volume of properties. The problem is that it is misleading to most consumers… buyers AND sellers. About the only thing it does is make some sellers feel better about their homes… but it doesn’t really do that honestly.

If YOU want to find out about YOUR Gwinnett home’s value, give me a shout.

AJC link…

It’s Even In the BAD School Districts Now…

Wednesday, 17 April, 2013 08:01 Written by Lane Bailey

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And no, I am NOT going to volunteer which ones those are…

Gwinnett County, Georgia (Photo credit: Dougtone)

Today during our weekly brokerage meeting, my broker was talking about builder activity. South Forsyth County has been going nuts for a few months now. And since inventory has been so low and demand so high, he mentioned that it’s even spilling over into bad school clusters…

Frankly, I got a kick out of that.

But, it is also VERY true. We’ve been seeing inventories drop like a rock in a lot of pockets. Interest rates are trolling along at unbelievably low levels and prices are still suppressed by short sale and foreclosure activity. Gwinnett is moving in a strong direction… Forsyth has been there for a while and we have watched as the builders moved further up-market… now it seems like there is a LOT of activity in the $500k range. A year ago, it would have been suicidal for a builder to put up anything at that price… now they are pre-selling half of their lots before getting a model built.

In fact, one community opened in the last few days and had people CAMPING out over night to be first in line to reserve houses… Real estate is such a deal right now that it is getting BLACK FRIDAY attention.

Rural public high school, Walkertown, Forsyth County, NC (Photo credit: Government & Heritage Library, State Library of NC)

I need to be quick to point out that Gwinnett isn’t quite as far along as Forsyth in that regard… GREAT if you are a buyer, and not too bad if you are a seller. Forsyth had a little advantage in that there weren’t as many foreclosures as in Gwinnett. Gwinnett is also a much larger market, so it takes more to turn it. But we are seeing dramatic decreases in “wholesale” activity (foreclosures) as well as distressed properties like short sales. At the same time, “retail” sales are surging and inventories are dropping.

So, while prices are still struggling a little, they are much stronger than the last few years, and often, well prices homes are pulling in multiple offers… even over listed price.

If you want to have a conversation about YOUR Gwinnett County home, give me a call.

To Renovate or Not to Renovate?

Wednesday, 03 April, 2013 10:25 Written by Lane Bailey

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That is always a question…

And like most questions, there are two polar opposite answers that leave little room for anything but personal interpretation.

Don’t Do It…

The White House renovation (Photo credit: Wikipedia)

It is a pretty easy case to make. The bottom line is that there are few, if any, renovations that you can do that will increase the value of your home. About the best you can do is get back around 75-80% of the money spent on the renovations. Of course, that is assuming that you are paying someone to do the job, not doing it yourself…

Looking at Remodeling Magazines annual statistics, there are a couple of standouts, but few things will get back that much of your money at sale time. Link

So, renovating prior to selling your home prior to sale is really only a way to burn cash that you could plow into a new home…

Not So Fast…

There IS one thing about renovating that does make sense. Competition. Aside from needing to compete for buyers with the house up the street, you need to compete with new construction… now more than at any time over the last few years. Here in the Atlanta suburbs, builders are going NUTS. They are barely able to keep up with the demand, and standing inventory is hard to find.

In order to effectively compete, YOUR house needs to look its best. Those renovation may just pay back in a quick sale. And that might be worth a little lost money…

My Opinion?

Coraopolis Railroad Station (Photo credit: Wikipedia)

Don’t go nuts… Price fixes everything, and you may not have to take the same kind of hit on price as the renovation might take. Doing a $100k major upscale kitchen remodel probably would be overkill. Putting up a fresh coat of paint, however, DOES make a lot of sense.

Do NOT forget that your time IS valuable. That is one issue that I often see. People remember that the paint will cost $200, but forget that they are going to be spending 20 hours applying it. If you are going to renovate, don’t discount the value of your time to $0. Sure, you might not need to value your weekend labor at $100/hr, which some contractors WILL charge, but give it some value. Weigh that into your decision.

Next week we’ll be looking at it from the buyer’s perspective…

The Appraisal Came Back Low… aaarrgghh!!!

Wednesday, 27 March, 2013 15:48 Written by Lane Bailey

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Commonly heard, especially from sellers right now…

Let’s get a couple of things out of the way.

Back during the “boom”, it was almost unheard of for an appraisal to come back too low. The banks wanted them high, and the appraisers were getting paid by the banks. The thought was “real estate will always go up, so if the value is a little out of line, it’s OK”.
Around 2007/2008, that stopped. There were a lot of big changes in the appraisal world…
Appraisers NOW are all but forced to be VERY conservative.
Appraisals are based on “comps” sold within the last 6 months… sometimes 12 months.

1939 United States Appraisers Stores Building, 7300 Wingate, Houston, Texas 1205201547BW (Photo credit: Patrick Feller)

So, where we find ourselves in the current real estate climate is with price appreciation happening, most noticeably at the entry level end of the market. Homes are OFTEN drawing multiple offers and selling over listing price.

As a byproduct, values are outstripping appraisals. It isn’t always that the prices are out of line with other homes in the neighborhood… it is often because the appraisal process almost demands that appraisers work with information that is out of date.

On average, after a buyer and seller agree on a price, it may take from 30-60 days for the sale to close. After that, it may take another 30-60 days for the sale to be recorded with the county. The local MLSs are a bit faster, generally having the sale information within a week or so of closing.

So, the Appraiser is working with sale prices that reflect where the market was anywhere from 1½ to 4 months ago… at best. And in the market we are in, there has been about a 10% increase in pricing, dependent on location, price segment, etc. But much, if not most of that appreciate has been more recent than the 6 months an Appraiser is looking at.

The next issue that we run into relates to condition. Many of the properties that sold last year, or the year before that were in pretty rough shape. Much of the foreclosure and short sale inventory has been worked through, but a year, and even 6 months ago, it accounted for a large chunk of the sales. Now, with constrained inventories, that isn’t the case.

Housing (Photo credit: james.thompson)

Appraisers DO adjust values based on condition… but the problem is that often the adjustments are based on a limited amount of information available in an MLS listing for a bank-owned property. Sorry, but many of the “REO Agents” left minimal information for the appraiser to work from. It wasn’t uncommon to see a bank-owned listing with 4 pictures, and NO details about condition of the property.

Subsequently, the Appraiser might not know that the house that sold a year ago in the subdivision for $75,000 less than the house you are dealing with also happened to need $50,000 in work to bring it up to where it is now. And his adjustment for that house might have only been $10,000…

The result is that we see neighborhoods with homes that sold for $100,000 last year, with homes that could (and do) sell for $175,000 this year. Seems like a HUGE increase in value, but the reality is that the $100,000 house needed a tremendous amount of work to get it up to where the current houses are. Coupled with the reduced inventory and increasing prices… the current price is NOT out of line with reality.

But then…

The appraisal hit. And it hits HARD.

The buyer either freaks out and thinks that he wants a MASSIVE price cut because of the low appraisal, or starts freaking out that there is no way they can buy the house.

The seller either freaks out because he has to take that much more of a loss, or becomes despondent because he doesn’t think he’ll ever be able to sell his house.

Nobody wants to return anybody’s call…

Solutions…

AP of Large Residence under construction for use in an appraisal article (Photo credit: Wikipedia)

Actually, there are some things that can be done…

Buyers – You have to realize that the appraisal is an opinion of value, often based on out of date information. It is NOT the Appraiser’s fault that it is low… the Appraiser HAS to work within very specific guidelines.
Sellers – Same thing.
Both – Don’t yell at your agent. We aren’t picking the appraisers. Neither is your Mortgage person. But, we WILL try to help.
Sellers – One of the best ways to start is to buy (yes, spending money) an appraisal PRIOR to listing your home for sale. Forewarned is forearmed. It is better to know well in advance that there could be a problem than to get slapped by a shocker appraisal just when you think you are on Easy St.
Agents – Do your homework. Is the CMA for the Seller (or the Buyer) “real” or is it manufactured just to tell them what they wanted to hear? If it is based in reality, give the Appraiser the comps you used. You can NOT tell them what to value the house at, but you can help them get to where you are.
Sellers & Seller’s Agent – If you get a pre-listing appraisal, talk with the Appraiser about helping to fight the low one. They speak the same language and might have an easier time working everything out.

There is one other tidbit. If the appraisal is done for an FHA loan, it sticks with the house for 90 days… that mean ANY subsequent FHA loan from another buyer for the next 3 months will use the same appraisal. And if you think it is out of whack now, think how out of whack it will be in 3 months…