Anatomy of a Bargain: 22 W 2450 N. Layton

Today's post will illustrate how I helped one of my clients find equity (read: money) in property in the current marketplace.

For most folks, making money in the real estate market is easy to understand. The rule is to buy any property when the market is real hot and then just let it appreciate. Sounds easy when you put it that way. So then, how do you know that you aren't buying at the top of the market? Hmmmm? I beg an answer from the easy money crowd. (I have dubbed this type of investment model the Pay-And-Pray Model - pay full price and pray for appreciation.)

The point I am trying to make is that yes you can make money when the market goes up but you can also make money when the market is flat or down even.

Here is our case study:

I have a client who needed to get into a home. They had been living at home with their folks while they transitioned from a move from Las Vegas. They were eager to get into another place of their own but were skeptical of the marketplace due to their experience with the Las Vegas housing market. They wanted to make sure they didn't get in over their heads with the home here.

After visiting at my office I convinced them that we could find a home that would meet their needs and in fact find a great bargain. So the search began....

22 W 2450 N was our first offer. It was a short sale listed at $220K. At 3000 SQFT that was a great value. However, since it was a short sale and listed at such a low price, we expected several offers to be in play. I suggested we offer $225K just to be competitive. Sure enough, when confirming the receipt of our offer, the listing agent told me that there were 6 other offers on this same property.

This news was discouraging so we went shopping for other property. We placed additional offers but couldn't come to terms with the other sellers. Then, about three weeks after our initial offer, the listing agent for 22 W 2450 N calls me and says the bank has approved the sale but at $240K. That was quite a bit higher than our original $225K offer. However, due to the higher approval price, all 6 other offers had jumped ship. My clients decided to counteroffer back at $230K. 10 minutes later we got a call back saying, since there were no other contenders, the bank would accept our offer.

Here is the first page of a 3 page CMA for this home.


As you can see, my clients are now the proud owners of a $280K home that they purchased for $230K. The home needed $10K in carpet and paint. Not a bad deal at all!

If you are in the market for a bargain, give me a call.

Flashback: The Shupe Williams Candy Factory Fire

A couple years ago my brother-in-law called me up and says,"Hey you gotta come see this fire. The old candy factory is burning." It was really late and I had church the next morning. I told him I wasn't interested and that I had seen house fires before. He wasn't satisfied with my answer and continued, "No. You have GOT to come see this...I will pick you up in two minutes." I had no choice at that point.

The video below is from March 11, 2006. I am filming. Prior to this date there had been a great debate in city hall about the future of the building. The factory was a city landmark and very cool. It was in serious need of restoration. Unfortunately, it was also located directly next door to the local homeless shelter. They were booked up and it was a cold night. Someone started a fire on the second story to stay warm. Click play to see how it turns out.

Ogden City Documentary

The Standard Examiner has a clip from a very cool documentary that is set to air on television shortly. My wife and I own the DVD. I would suggest picking up a copy.

-OGDEN DOCUMENTARY CLIP-

A Dramatic Return to Stable House Prices

OFHEO published its MSA quarterly appreciation numbers today. Here is a snapshot of the Utah Market.


In this chart anything above 0% represents house prices increasing and anything below 0% represents declining house prices overall. The measurement is for appreciation based on house prices a year from when the measurement was taken. For example: Todays OFHEO report for Q1 2008 shows that Ogden appreciated 6.64%. That means that house prices in the Ogden area market (Ogden-Clearfield MSA or better interpreted as Weber/North Davis areas) are 6.64% higher now than they were back in the first Quarter of 2007. That is down from our peak year-over-year reading of above 15% recorded in the beginning of 2007.

The way I read this is that house prices are returning to the regular flat pricing period that traditionally follows our boom cycles. Home prices very rarely decline in our market, they just follow inflation (which has been low for a long time until now) and wait for the next surge in pricing.

So what does this mean for buyers and sellers? Keep in mind that for a homeowner to sell thier home they need about 10% equity in order to pay for marketing and title expenses and any possible seller concessions that normally arise in a buyer's market. Based on this chart, if you bought your home in March 2007 with 0% down you would not have enough money to cover those expenses. That means that unless you put money down on your home you would need to wait for another year or so for your home to appreciate so you didn't come to the table with money out of pocket when you sold the home. Of course, if there is a hardship, short selling the house may be necessary in order to prevent it from being taken back by the bank. We are actually seeing more of these types of transactions in the marketplace right now.

If you have owned your home for more than 18 months (and not refinanced it to the hilt!) then you can still sell your home with ease. In fact, if you are patient, you can find yourself a terrific bargain and actually increase your equity position significantly with the next home. There are great bargains out there for "Scratch-and-Dent" homes.

I have a client who was patient and we were able to him a fantastic bargain on a home. In this particular case, the home is 5 years old in Layton. The list price was at $220K as a short sale. Comparables in the area were $280K. The bank ultimately accepted a price of $230K. That is 50K instant equity for my client! The home needed new carpet and paint. Not a bad deal at all. I will post the information on this deal a little later.

The bottom line is that regardless of what the market is doing, its always a good time to purchase real estate. You just need to know what to look for and have a highly competent agent show you the way.

ECB's Wild Ride

Recently, I was looking at market data for the last couple of months for the Downtown Ogden area. It seemed to me that sales were very low for this time of year. Rather than just scratch my head and move on to something else, I started doing the research. Here is sales volume for the East Central Bench Historic District in Downtown Ogden for the last 4 years.



Winter months are blue. This is an interesting chart...at least to me. I think its interesting because this chart defies the normal seasonal cycle that you see in the county based chart from the earlier post. One thing you can see is the huge surge from the summer of 2007 followed by a complete drop off. March and April 2008 sales volume are the lowest in at least 4 years. I will have to go back farther in the data to complete this story.

What are the reasons for the drop off? I believe that due to ECB's non-traditional (i.e. bread and butter suburban style) housing supply, the market in this neighborhood is affected differently than the overall marketplace. Investors make up about 50% of the home owners in this neighborhood. Its reasonable to assume that they are therefore 50% of the buyers in the marketplace. The marketplace is also attractive to those with less than stellar credit. They can purchase an affordable home and still have payments that make sense for their incomes. Since August both of these buyer categories have been under assault by the banks. I believe this explains the significant decline.

I will put another chart together later that shows price movement over this period. From what I saw while mulling through the data it has made some amazing changes for the better over the last 4 years. Stay tuned for that info.

Picture of the Day

I found this sign on the 500 Block of 23rd St in Downtown Ogden. I couldn't have said it any better myself.

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.

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...

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.

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.