Tuesday, April 29, 2008

The Unwise Investor

Here is the promised post about how NOT to invest.

There are many reasons investors bellyflop on their investments. Greed, indecision, improper financing, or over-zealousness can all cause a good investment to turn bad.

The example I share with you now is probably one of the most egregious I have seen of an otherwise good investment turning into a nightmare.

2920 Childs seems like a great property. Its condition is impeccable. It is better than brand new. Top end appliances are included. The home has exquisite trim work, canned lights, and more. This is a beautiful home ready for sale at $144K. The sellers even have done an appraisal in advance to make it easier for the new buyers to get a loan. From the appearance of the home the seller should have no problems selling it...in theory.

This investment seems like an even bigger money maker when you take a look at what the owner bought it for. They purchased it from the bank for $39500! What a steal!

With such a cheap property turning into such a beautiful home, how can this investor go wrong? He should be rolling in the money, right?

Lets consider for a moment the factors that play into what gives a home its value. When people buy a home they are purchasing three things: The House, The Land, and The Neighborhood. These three things combine to determine what it will sell for in the open market. The House is in impeccable condition. For homes like it, it should rank among the best and command the best possible price for what it is. For The Land, the lot is standard for the area and home type. Nothing out of line there. But what about the The Neighborhood? This is where our tragedy begins. Here are the comps for the street.

This does not look good. I don't know if the owners of the home had seen these before they purchase it. If they did, they clearly miscalculated what their investment could sell for. If not, then they should have worked with a professional Realtor that would show them this fundamentally important market data. Here is the $/SQFT breakdown so we can compare apples to apples.

WOW! The post fixup price is way off the charts. The sad thing is that I talked to the owners about this home and they said they were into the property just under what they were selling it for. They spent way too much fixing it up. If they had done an average job and made the property tenable, they would have had a good investment that even could have cash flowed. Now all they have is a property that is over improved in a depressed neighborhood. It will take them 10 years to recoup their costs at least. My bet is on 15 to 20 years.

The moral of this story is to be wise and play by the numbers with your investments. If you start out and you buy right you are safe. If you then over improve, you are not. The quality of the fix up job you do should be directly correlated to the neighborhood in which the property resides and more importantly where the area is trending. Is the neighborhood bad but getting better? Then do a better job than you would otherwise but still stick within a reasonable budget. Is the home in a slowly declining neighborhood? Then make it clean and tenable and rent it out. Don't put granite counter tops in it. You're wasting your money.

Feel free to comment or ask questions.

Monday, April 21, 2008

Example of Smart Investing

Ok folks. For those of you who need a visual presentation of what smart investing is, I have laid out the fundamentals so you can see what a proper investment is supposed to look like.

Our case study today is 2729 Quincy Ave. in Ogden. Its a cute brick bungalow with 4 bedrooms and in average condition. Here is the spec sheet from the MLS.

This was a bank owned (or REO) property. As you can tell from the remarks, the bank wanted a significant earnest money deposit in order to consider any offer placed on the property. The property was originally listed at $106,900 on 11-15-07. There were no takers. The bank dropped the price to $94,900 on 12-14-07. Still no takers. On 1-11-08 the bank dropped the price again to $89,900. One contract was accepted 2-1-08 and withdrawn on 2-11-08. Then another offer was accepted 2-22-08 and again withdrawn on 2-27-08. There must have been some condition issues that needed to be addressed at this point because the bank finally reduced the price to $83,900 on 2-29-08. Along comes our winning cash bidder on 3-14-08. The buyer pays $78K and takes the property.

So, was this property a good deal? Lets assume the usual bank owned property condition: Odor issues, some plumbing and electrical work, and need of new paint and carpet. Lets estimate repairs of $12K. The home sold for $78K so the buyer will be into the place $90K after repairs. Did this buyer get in over his head? Lets take a look. Below are solid comparable sales.

Just by looking at the sales prices, it seems this buyer is off to a good start. In fact, he will still have about $25K equity AFTER repairs. But lets take a closer look at the $/SQFT comparison. This will equalize the minor differences in size, floorplan, ect.

When we look at this chart, this investor did very well. He picked up this property for $42/sqft versus the retail sales prices in the $65/sqft range. That is smart investing. This investor made money when he bought the home. The best part is that 4 bedroom homes rent for about $850 in downtown Ogden. With a $90K mortgage his payment will be around $700. Thats a $150 profit each month on top of the huge equity position he has gained. Very smart.

In a future post I will feature dumb investing. Stay tuned...

Wednesday, April 16, 2008

Utah Ranks Low On Foreclosures

The figures have come out and Utah is still low on the foreclosure list. There are still a bunch of bargains out there but the lack of abundant foreclosures here in the state is what is keeping end-user prices stable. Here is an interesting comparison:

Utah - - - - - - -1 in 733 Households in Foreclosure
Florida - - - - - 1 in 282 Households in Foreclosure
California - - - 1 in 208 Households in Foreclosure
Nevada - - - - - 1 in 139 Households in Foreclosure

I expect that we our rate of foreclosure will increase as our employment numbers soften somewhat but it will not reach the proportion of Florida, California, or Nevada.

Friday, April 4, 2008

Spring Surge in Sales - Bargains Abound

Today I wanted to talk a little about what is REALLY going on in the market and what that means to you.

I recently discussed the prospect of marketing one of my clients homes so they can upgrade to a home more to thier liking. During this conversation my clients told me that they didnt think now was a good time to sell because there were so many homes on the market. I would feel that way too if I didn't know what is actually happening regarding sales and market activity.

Here is what is happening:

After a significant 6 month decrease in sales volume through January, we have finally returned to the normal seasonal cycle. I have attached a chart showing that we are on the uptick in sales. Financing is still widely available for credit worthy folks and those with cash (or proceeds from the sale of thier home) for a downpayment on thier next home. The dramatic decrease in sales volume that ended in January represents all the subprime and underqualified buyers being led out the home-buyers market and into the tenant market.

In a previous email I described how Utah house prices follow a stair-step pattern upward. Many of the homes for sale in todays market are for sale by speculators and investors who are "flipping" thier homes. Most of the price reductions you see in the list prices right now are adjustments back into what the home is actually worth. Alot of these folks overestimated thier home's values based on past appreciation rates. We were appreciating at 10%-15% per year for almost 3 years. In July that rate went to almost 0%. It has taken sellers and agents (except for myself of course) a while to figure that out. So the bottom line is that alot of what you see out there for sale is over priced still. Accurately pricing your home for sale will guarantee it sells in market time. Right now that time is 3-4 months.

Now, what we see as a "bad time" to sell is actually a fine time to sell as long as you didnt buy the home on speculation less than a year ago. For the rest of us, it just takes a little longer to liquidate the home. The even better news is that with so many homes available, there are bargains out there waiting for a new owner. About 1 out of 25 of the homes for sale right now are potential bargains! Six months ago you could sell your house for full price and then you paid full price if not more for the next home. If you could sell your house for full price and get into a new home at 10% below full price, wouldn't that be worth it?

Well its definitely possible now.

Give me a call and I can talk to you about the 194 bargain properties available as of this post in
Weber and Davis counties.