Ice Land: Sledding Through A Frozen Multi-Unit Market

Earlier in the year I posted The Changing Face of Investment Financing.  The point was to illustrate some seismic shifts in the way multi-unit transactions were being conducted.  The year is almost over and I thought I would revisit that subject with updated charts.  Here is our first illustration:

As we can see, sales of multi units have fallen off a cliff in the last two years.  With 51 sales completed year-to-date (5 of which were mine...smile), we have seen a 78% drop in sales volume since 2006.  The decline seems to be lessening year over year so next year hopefully should be equal or slightly better in sales.  The catch is I don't think the market is going to feel any better next year.  What I think is going to happen is that sellers will simply become more realistic about their options.  Let's explain with the next chart:

 
As you can see in this chart, normal mortgage financing - the preferred means of selling a propety - has taken a nosedive.  Meanwhile, cash, seller financing, and FHA have increased dramatically.  Today there are 134 multi-unit buildings for sale in Weber County.  This year we sold 51.  Doing some quick math shows we have 2.6 years of inventory right now. Yikes!  This very slow absorption rate in the market means that sellers will likely become more motivated as time marches forward...especially the ones that aren't good at management.  Since there is no "saftey-net" of conventional selling out there to rescue troubled investors, I believe several things will happen:

1.  More owners will become troubled as the economy starts to take its toll on employement and therefore rents and debt servicing.
2.  Many owners, especially the over leveraged ones, will simply abandon their properties to The Dead Zone and the cash buyers that loiter there.
3.  Those that are not over leveraged will seek alternative arrangements to rid themselves of the burden of managing rental property (i.e seller financing)

So in 2010 look for conventional financing to take another dip lower and cash and seller financing numbers to increase.  Also, look for FHA numbers to flatten as FHA tightens guidelines in the next several months.

2010 should be a great year for alternative finance.