Tuesday, September 23, 2008

August Sales Anomoly

Sales volume for August was surprisingly low. Normally July is the slow month for the summer as folks are on vacation and busy with family reunions. Most folks want to get their kids in school and usually will purchase a home in August in a frenzy. This year was different. Unfortunately, I don't know how to account for it. Fannie Mae and Freddie Mac were in their last days during August but nobody knew they were going into convservatoriship until this month.

It will be curious to see how September's sales turn out on the whole. Interestingly, my personal business is up despite all this. I can attribute it to prospecting, perseverance, and providing professional service.

Here is the chart:

Monday, September 22, 2008

Economic Insanity

The jury is still out and several more shoes need to drop regarding the U.S. Government Bailout of Wall Street. Congress may or may not pass Treasury Secretary Paulson's plan. The markets may or may not like it. We will have to wait and see.

Regardless of the outcome, our economy is experiencing and will continue to experience convulsions as it goes through withdrawal symptoms. In this case, the opiate was mortgage backed securities that were founded on nothing more than sham loans.

As far as housing goes, the fundamentals tell us that if this bailout passes, interest rates in the future (not immediate future but maybe a year or so out) will go up. Inflation will increase. House prices will go up but fewer people will be able to buy with a bank mortgage because interest rates will be too high. Think 1978-1982. Seller financing will abound.

If this bailout doesn't pass (and I hope that it doesn't), you will see a large number of firms disappear due to poor decision making. The economy will slow as it always does when it is clearing the excesses out of the system. House prices in Utah will stay intact mostly. Home prices abroad will continue to decline for a few more years. This fact is almost unthinkable to folks in charge of our government (particularly in an election year) and therefore they feel compelled to do something about it. Unfortunately, doing so only moves the losses from those responsible (the banks) to those who are not (you and I- the taxpayers).

Thursday, September 11, 2008

Condo Conversion in Roy? Whoa?!

There was an interesting article in the Standard today about a condo conversion going on in Roy. This caught my attention because usually you see condo conversions in a seller's market. We are definitely in a buyer's market right now. Also, in order to make the conversion, the owners are spending significant funds on capital improvements. They are adding covered porches, landscaping, ect. That is a major investment in a soft marketplace.

I wanted to see what the condo market was like in Roy so I ran the numbers on the MLS. Here is a photo of what the place looks like now versus the MLS photo of a complete project.

You have got to love the computer generated renditions complete with white puffy clouds.

So here is how the numbers shakeout. Comparable sales in Roy are between $75 and $110 per square foot. The ones for $75 are average in condition. The ones for $110 are brand new and architecturally appealing. With a list price of $124,900 for 875 Square Feet the condo conversions are for sale at $142 per square foot!! They must have gold-plated toilet seats in there.

I sense some disappointment coming soon to the investors in this project. It sounds like the expectations may be a lot higher than what reality will afford. These units will likely sell for around $90/sqft due to the awkward nature of it being an older floorplan with a new facade.

I wish these guys luck with the conversion but my gut check tells me they are not going to make any money doing it.

Friday, September 5, 2008

High-Density Dismay - Part II

The North Ogden city council rejected a proposed multi-unit project today. More fears from the suburbs about increasing demand for affordable housing.

Here is a quote from Councilman Richard Harris:

We need to remember what makes North Ogden North Ogden - that's big open spaces and I am pretty well committed to keeping it that way.

Here is a photo of some of North Ogden's "big open spaces":

Councilman Carl Turner I think expresses the true sentiment of North Ogden:

I think the design is great...but not for North Ogden.

Just more of the same "We don' want those people living here."

Wednesday, September 3, 2008

Perils of Landlording: Canine Catastrophes

Being a landlord is not an easy chore. Before becoming a landlord you need to have a reality check: Not everyone chooses to live like you do. Some people choose to leave the TV blaring all night long. Others prefer to pour their waste bacon grease down the drain. Others have a knack for never doing the dishes. Yet others prefer to keep their dogs inside...always.

Now that we have a good grip on reality we can begin moving forward being a landlord. Keep in mind that the biggest part of making money as a landlord is screening. If you become an expert screener, you will become a profitable landlord and your experience will be rewarding. You will learn to develop certain policies and rules. Some of these will apply to a tenants credit record, others to income, and others to pets.

I reaffirmed my policy of No Dogs today. Tenants moved out of one of my rentals over the weekend. They called me and said the place was clean and in good order. I had been over to the home a month prior and the home seemed well kept. I remember nice scented candles were burning during my visit which gave the place a nice fresh smell.

Yet, when I opened the door after they moved out, what was there to greet me? Here I beheld a cute well kept home that was choking with the smell of dog urine. It was like getting smacked in the face with a two-by-four.

I initiated the lease with these tenants two years ago prior to my No Dogs policy. A later bad experience had solidified this rule for me. However, I never expected a bad experience from these tenants.
On the surface, the carpets seemed to look good. Here is what the back sides looked like:

Urine Urine Everywhere But Not a Drop to Drink. The back of the carpet should be uniform gray in color and instead we have something that looks like it belongs in Yellowstone Park. If you scratch your computer screen over the photo you can actually smell the carpet. Not surprisingly, the pad was completely disgusting as well. Subfloors too.

In all, this reflooring experience will top $2500. The tenant's (now forfeited) deposit was $700 so I am out about $1800 for the experience. Unfortunately, these particular tenants suffered a significant decline in their credit so it would be pointless for me to take them to court. As the saying goes: You can't bleed a turnip.

The bottom line is that YOU MUST CREATE RULES TO PROTECT YOUR PROPERTY. I effectively wiped out more than a year's worth of positive cashflow by allowing this to happen. I am fortunate that appreciation on the property compensated for it. However, in a marketplace where prices are flat, you can't afford to make mistakes like this too many times before your goose is cooked. I recommend banning dogs from your rentals.

You can solve the pet odor problem very easily. First, you have to concede that the carpet is not worth saving...even if it looks ok. The odor locks into the fibers and the pad. If your carpet cleaning guys can't get it out with one pass, then you must scrap the carpet and start over. Since urine is a liquid, it will sink into the wood subfloor. I have made it a practice to run over the dry wood with a water/bleach mix. The bleach will neutralize the ammonia in the urine and chemically begin to break down the odor. You will notice foam bubbles forming where the bleach reaches the urine spots. This means that its working and is creating a gas. WARNING: THIS CHEMICAL PROCESS CREATES HYDROCHLORIC ACID GAS WHICH CAN CAUSE LUNG DAMAGE AND DEATH. In other words, do this at your own risk. When in doubt, don't do it. The other thing I do after the floor is dried is paint KILZ brand stainblocker on the floor. This chemically seals any muted left-over odors into the wood. It is highly effective. Once the KILZ has dried for a day or so, you are ready for new carpet and a fresh smelling home. I have done this on 6 homes with complete success each time.