Saturday, August 29, 2009

Photo of the Day: Resort Ruins

I visited Midway, Utah this weekend on an errand. While cruising around here last fall, I found a subdivision that looked like it had been abandoned by the developer. Curious about this place, I cruised by today and found that the abandoned homes are still there. Here is a photo.

In new construction, you have about six months to "dry-in" the home before you have to throw the framing away and start over. These homes have been sitting in the weather without roofs for almost 18 months. Take a look at the stack of sheetrock on the curb.

Judging from the footprint of the home and the location, on the golf course next to the Homestead, this home was probably a $800K-$1.2M project.

Now the framing needs to be demolished and whoever purchases the lot and foundation will need to start over again. Due to the demolition expense, the existing framing now has a negative value. The lot would be worth more without it.

It will be interesting to see how the resort markets correct now that demand for secondary housing is now significantly less.

Wednesday, August 26, 2009

The Landlord of Death

I was reflecting on the recent sale of an investment property and some of the things I learned while I managed it.

Back in 2006 when I had a vacancy, I had a couple apply to rent the home as a lease option. Mark was a blue-collar guy who just came out of an ugly divorce. His credit was trashed and he needed some creative ways make purchasing a home work for him. His new fiance was organized, had great credit, and already owned a home in Clearfield. She was selling her property in order to merge their two households.

They didn't have the $2500 I required for the lease option so he gave me $100 to hold the property for a week while he procured the rest of the funds. A week later they gave me the remainder of the funds and were scheduled to move in on a Friday. On Thursday I got a livid call from the fiance. She is telling me that the home is filthy dirty and totally unacceptable. I agreed to meet her over at the home to discuss the situation. When I arrive she starts screaming at me about how unclean the place is and how much of a scumbag I am. I was shocked since the place was really quite clean. Her tone became more aggressive and I told her that perhaps the home wasn't the right place for her. I offered to refund her option money and cancel the lease. When I did this, she rebuffed and said that she instead wanted an $800 cleaning refund. We both decided to think about it overnight and follow up the next day.

When I got home there was a bright yellow envelope in my mailbox from the bank. Apparently, the $100 hold check they gave me 10 days previous has bounced. Whoops! If $100 had bounced what was $2500 going to do? I immediately called the fiance and told her about the bounced check. She was completely embarrassed and apologized again and again for her unkind treatment of me that evening. I accepted her apology and she then divulged that she had doubts about her future husband and she wasn't sure if things were going to work out. That was pretty big news.

Mark called me later that evening and wanted his $2,500 refunded. I told him that since his little check had bounced, I needed to wait 10 days to make sure the big check didn't bounce. He agreed to wait for it to clear.

Monday morning the fiance calls me up crying. I was a little disconcerted because I thought we had everything worked out. I said, "How are you doing?" and she weepily blurts out "Mark died!". From her tone I could tell she wasn't kidding but I still was incredulous. "What? What happened?" I said. She then began to tell me that Mark had a heart attack and passed away the day after our confrontation. He was 42.

Needless to say, our lease agreement was voided. Legally, I had the right to retain the $2,500 option money but I discovered that Mark had borrowed that money from his father. Now his father had to bury him. Since that check didn't bounce, I refunded his father the $2,500 to help pay for the funeral.

The interesting thing about this story is that living through it was so surreal. In the midst of all the confrontation and craziness, I felt like I was part of a play that I had not written nor did I know the end. I honestly believe the Lord knew it was Mark's time to go and this wacky drama was the run-up to getting him there. It's very strange to be a part of it.

In any case, I share this story so my tenants know never to bounce a check on me. They do so at their own peril.

Monday, August 24, 2009

Investment Analysis: 165 W. 1875 N. North Ogden

My real estate investment company recently liquidated a home it had held for several years. I thought it would be a useful exercise to do a post-mortem on investment and see how we turned out.

The home was purchased in November 2004 as a short sale. The previous owner had built the home to suit his budget. The home boasted contractor grade carpet and no automatic garage door. You could tell the owners skimped on flooring to make the home affordable to them. When the guy lost his job, he risked loosing the home to the bank. So, we stepped in to purchase it.

The 3 bed 2 bath 2600 SQFT home was purchased for $120,000 using hard money. Unfortunately, the owners wouldn't leave the home after we closed and following two weeks of wrangling with them, we finally paid them $200 to find a hotel. After $5K in out of pocket repairs (new flooring, paint, some plumbing fixes, and a garage opener), $5k in hard money fees, and $5K in loan closing costs, we refinanced the home for $130,000. The home appraised at the time for $155,000.

The home was purchased as a cashflow investment with an eye toward equity banking. The total obligation (1st mortgage, 2nd mortgage, HOA, and water) each month for the home was $868.

We immediately began marketing it for rent and found our first tenants. They agreed to a lease option and payments of $950/mo. They initially agreed to pay $2500 as an option payment but absconded on our plan and instead paid a fee of $1500. Ironically, the fee was paid just a couple months before they decided they didn't want the home and moved on. They stayed 18 months.

The next tenants were strictly renters with an $700 deposit. They agreed to pay $1050/mo. They stayed 24 months and thrashed the carpets and floors by the time they left. See what kind of mess they left. The repairs costs us $2500. We decided to upgrade the linolium floors to tile and that cost us an additional $2500.

Finally, our third set of tenants moved in. The new tenants were related to someone we were personally indebted to; so, as a good faith gesture, we leased the home for a very low rent of $925/mo. They stayed 9 months.

Here is a breakdown of the revenues generated over the 4 Years and 10 months we owned the home:

In this example, initial fix up expenses when purchasing the home are kept on our resale ledger instead of our cashflow ledger.

So what is the bottomline on cashflow? For the 58 months we held the property, we earned $66/mo. Not super exciting but much better than a poke in the eye. Also, not bad considering the home was almost zero maintenance for 5 years (except for the one-time carpet issue).

Now for the exciting part...lets take a look at our resale ledger:

Here is a copy of the check (turned into a shameless marketing piece) from the title company:

Now this is exciting! The net cash proceeds from the sale are the direct result of two things:

1. Purchasing the home right (wholesale) relative to the market at the time in 2004.

2. Riding the appreciation wave up through the sellers market of 2006-2007.

Interestingly enough, the home would appraise for $210K but the market in North Ogden is so saturated with inventory that it took a steep price discount to $180K to get it sold. Ironically, the buyer of the home is another investor looking to cashflow. The home was priced at such a good bargain in today's market that the next owner will likely experience the same cashflow and resale benefits that we experienced. Hopefully, he will fare even better by screening his tenants carefully and avoiding an expensive remodel.

If you are wanting to invest in real estate, let me show you how it's done.

Friday, August 21, 2009

Peer Into Jeremy's Crystal Ball....

Some time ago I wrote Investing in the Market Cycle - Know what to Do When. In it I described three phases of the real estate cycle. I included charts that described the Utah market model.

For reference purposes here is that chart:

So this first chart is theory and is a good guide. Now lets talk about reality:

If you are looking for hard data on where we are, where we have been, and want a hunch on where we are going, this chart reveals all. The black line represent the adjusted house price index for Weber, Davis, and Morgan counties. The red line represents appreciation rates (%) for these same counties. So, according to this graph, if you bought a $100,000 home in 1986, that same home today would be worth just under $300,000. If you look at homes that were selling in 1986 for 100K you will find that this assessment is pretty accurate.

As you can see, the theoretical chart was made to closely resemble reality. The purpose of our second chart is to show what the different phases look like in real life. In our chart the brownish area represents a market correction or phase 2. The yellow areas represent buyers markets or phase 3. And finally, the red areas represent seller's markets or phase 1.

We are currently in a correction phase with prices depreciating slightly as has been the pattern in the past. I anticipate this correction to last at most 6-12 months longer before we enter a prolonged buyer's market phase. The most recent correction/buyer's market combined phases lasted 6 years (1999-2005) total. The one before that (1986-1992) was also a 6 year stint. We are only a year or so into our correction and if, history proves predictive, we have another 5 years to go.

If you want to be rich in 10 years, buy as much wholesale real estate as you can for the next 5.

Thursday, August 20, 2009

Utah Foreclosure Ranking

One of my favorite blogs is Calculated Risk. This is a no-BS site on economic facts and figures and I highly value the information presented there. Today the blog posted this chart which I found quite interesting:

This ranks the percentage of mortgages in foreclosure or delinquent in each state as reported by the Mortgage Bankers Association. Utah is in the bottom 3rd of the group. Interestingly enough, 10% of homes listed in Utah are short sales right now. This roughly corresponds to the combined figure reported on this chart for bad loans. Bank Owned properties do no show up as short sales on the MLS however, so I believe that the difference is made up by folks trying to short sale their homes prior to becoming delinquent on their mortgages.

Monday, August 17, 2009

Media One: A Giant Bumbles Into The Briar Patch

Media One, the parent company of the Salt Lake Tribune, the Deseret News, and Hometown Values Magazine has announced it is now a Real Estate Brokerage!

This should be an interesting and likely unfortunate excursion for the media company into a field which is dominated by seasoned specialists.

The business model they espouse has been tried before: List homes for cheap and list them for volume. We might remember the now-defunct Real Estate Mint who advertised heavily in 2006 and 2007. They followed this same model.

So far the Media One brokerage boasts three agents. That level of manpower will certainly irk sellers who want more communication and service from their brokerage. Nevermind working with buyers.

Lets watch and see how they pull this together. My bet is Media One will be out of the business in 14 months.

Friday, August 14, 2009

Landslide Devours Widow's Home

The Standard Examiner reported this morning about a home that was demolished by the County due to landslide problems.

The 6,000 SQFT home was built in 2001 in Mountain Green.

Geologic hazards are not new to developers in Utah. I wrote about a bunch of them here. What baffles me is that developers do not do sufficient due diligence to predict where these types of events will occur. I am unsure whether it is a prohibitive cost or if mother nature is simply too unpredictable to make the extra testing meaningful.

Anyway, my heart goes out to this widow to lost her home. Let it be a warning to all of us who try to push the envelope by risking building on geologically active ground.

Photo Courtesy the Standard Examiner

Thursday, August 13, 2009

July Sales Charts

Its a mixed bag this month. Davis County appears to have reached bottom on average sales volume and is now pushing for growth. Weber County is still trying to find its bottom. However, I suspect it is almost there. Wohoo!

FUN GAME: Can you spot the bubble in the below charts?

Thursday, August 6, 2009

Google Maps Shows Foreclosures

Google Maps just enabled a very interesting feature that allows you to see REO and foreclosed property. Its not totally updated but its enough to give you a feel for what is going on in various cities.

View Larger Map

Take it for a test drive!

Wednesday, August 5, 2009

We're Turning Japanese!

There has been an ongoing debate for the last two years about which direction our nation is headed economically. Some have speculated about hyperinflation as the government prints its way to oblivion. Even I have talked about future inflation, its causes, and the effect it would have on real estate. The other camp has talked about deflation. Particularly a Japanese style recession.

After learning a few things from those I trust on this issue, I am finding myself more in the deflation camp.

I don't think that deflation will go on forever, but for the foreseeable future (say 7 years or so), I believe it will have an impact on our national economy.

Real Estate is always a good bet in the long term. So how do you make money in a deflationary market?

The answer is "Buy Right". Or, in other words "Buy below current market pricing."

Lets take a look at an example and see how things play out. In this first chart, you bought a home worth $100,000 and paid full price and financed the entire purchase. Lets say the market has deflationary pressure from economic contraction, population shrinkage, war, or some other factor. If the rate of contraction is 1% per year for 30 years (highly unlikely in real life), you still experience an equity position (albeit small at first) the entire life of the loan. This is because, due to the time value of money, the amoritization pays off faster than the property declines in value.

If the deflation rate is 2% annually, then you pretty much maintain zero or slightly negetive equity until about year 10. At that point, you pay your loan down faster than your propety depreciates.

Finally, at a 4% deflation rate, you would be underwater for 23 years with the final seven years being in an equity position. No fun.

This example above is for those folks, mostly first time home buyers, who are getting into property with no equity position and little down payment..

Here is the chart for investors and those with downpayments:

This chart shows you what would happen if you bought a $115,000 home but only financed $100,000 for it. The scenarios are much more encouraging. In this case, you have equity in all the scenarios except the 4% deflation scenario. Hence, the importance of buying below market value or with significant down payments.

Of course, this is just a theoretical model. Unlike this model, Utah does not have a shrinking population. In fact, it is growing quickly from reproductively ambitious souls like myself (I have four daughters already) and immigration. Also, economically speaking, Utah is more balanced and has a friendlier business environment than most of the nation. For these reasons, we may experience the macro effects the national-deflation phenomonea (low interest rates, consumer product price decreases, declining wages) and yet have real estate not as affected by the problem due to our demographics and economic environment. Time will tell.

I expect that Utah will follow its usual stair-step-up price pattern with the runner on this cycle being extra long. Look for flat pricing for the foreseeable future in Utah.

Monday, August 3, 2009

Ahh! Crazed Kid-Arsonist On The Rampage

We just got back from vacation today. While we were gone my cell phone died so I checked my voicemail at the end of each day. On Saturday I had to sit and listen to this string of messages waiting for me:

4:00pm - From S.W. "Hey man, there are like five pumper trucks right near your house at 22nd and Jefferson, call me"
4:02pm - From Brinks Home Security "We have a fire alarm going off at your home. Please contact us."
4:28pm - From Brinks Home Security "We have a security alarm going on in zones 7,8,9,10...."
4:30pm - From my sister-in-law "Jeremy, call me I need your security code for the home!"

So at this point I was pretty sure my house had burned down.

Fortunately for me, it had not. Unfortunately for my neighbors, it was their home that burned down. We had left our window open an that is what set the alarms off.

The perpetrator of this atrocity was a nine year old boy. Apparently, he poured gasoline on the front porch and threw a match on it. Not out of curiosity, he didn't even live there, but out of anger because his grandmother took a toy away from him earlier. This is the same nine year old boy who lit the yard of Dee Elementary on fire across the street earlier. He is also the same young boy who broke into our church, stole the fire extinguishers, and fired them off with a bunch of friends.

This kid is clearly screaming out for attention. He needs to be put in a home of some type that can handle the vast array of problems he has.

I am just glad the kid didn't pick my house to torch.