The land value surely must be considered in, as well as other situations. For example we have a plush area here in Southern California in Ventura County where land cost plus replacement value is about $180,000 but buildings are selling for $250,000+
Normally this would be a disaster waiting to happen, except that the local government rations the number of new construction it permits. They have companies in there that build all they can build in January or February of the year then they have to wait until next year to build anything more.
The area is very popular because of the school district Las Virgines. I understand to get into that school district you have to have an affadavit from your landlord and copies of two utility bills.
I live in an area (near Aspen, Colo.) which has a vacancy rate of less than 1%. The inventory of houses for sale is very small, so they sell fast at full value. Even FSBO’s are not discounted, but are gobbled up at the asking price or above. Since sellers do not need to wait long to get a qualified cash buyer, they are loath to consider creative financing. There is a great opportunity in this market to buy high and sell higher, but one needs to be first on the spot with buckets of cash to wave around in order to get attention.
So, my question to the board is this: What are some creative ways to amass investor cash at the ready for instant access? I will need to be armed with full confidence of making cash offers in the $300,000 to $5,000,000 range, and being able to close quickly. Any thoughts or help on this topic would be greatly appreciated.
Thanks,
Michael Murray
Well, just be wary of buying things above the “replacement cost” amount. Property values go up and up but that gets the construction people in a frenzy too, especially if they see they can build a house for $150,000 and sell it for $250,000. At those rates they’ll build, and build, and build until they can’t build anymore. Many times an appraisal will show the replacement cost of the house and that will help you stay abreast of the market.
Posted by Mark (SDCA) on April 14, 1999 at 12:50:04:
I know this isn’t what you asked but…
Don’t be the one holding the property when the market crashes. (See California and Texas in the 80s for examples.)
What you are talking about is called “The Greater Fool theory”. (ie I know that I am a fool for paying this much for this property but a greater fool when come along tomorrow and pay me more.)
You must mean “replacement cost + land value.” Right? In my relatively inexpensive neighborhood (SF Bay Area) the replacement value of the houses (mostly 3bd/2ba) are maybe 120K. The FMV’s have fluctuated over the last 10 years as follows:
1989: $330K
1991: $270K
1993: $240K
1995: $250K
1997: $300K
1999: $370K
The same kind of 3br/2ba houses are going for about $700k in Menlo Park, and sell in about 3 weeks.
The builders would love to build and build but there is not much buildable land within a 10-50 mile radius.
Perhaps it is most important to wait unitl you can buy below today’s FMV. That will give you some cushion if FMVs suddenly reverse.
Thanks Sean,
There are certainly some being sold above replacement cost, and I agree that would be foolish to be in that camp. However, it’s a curious thing that some of these big-buck homes are actually advertised way below replacement cost, even though the market is escalating. The only thing I can think of to explain this phenomenon, is that sellers simply tack on some comfortable increase without really checking the actual costs. Some are too high, some are way low, but the buyers don’t seem to care. That creates a good opportunity for cash buyers to SELECTIVELY buy these at full asking price, jack them up to an obscene profit level, and turn them over quickly before any market crash.
Thanks for your input,
Michael Murray
I love your comment ! I actually call it “musical houses” hehe I am personally quite concerned about such an incident and pay close attention that I don’t hold anything that I wouldn’t want long term. Sometimes I get narrow minded and won’t even offer on something I wouldn’t want to get stuck with when the music quits playing. What a concept… Musical houses… How true though !
Thanks Mark,
I agree that the market could reverse without notice. However, the turn over rate here is so hot, that I don’t think there is much risk of being left holding much of any inventory if it happens. In the meantime, thar’s gold in them thar hills, if one has some gold to work with now. (See my reply to Sean above)
Thanks for your thoughts,
Michael Murray
BTW Any ideas where to find the people with the gold?
