Some advice on a prop - Posted by martin

Posted by ray@lcorn on December 09, 1999 at 13:33:40:

Martin,

I’m a little confused as to how a market can be at once overvalued AND sluggish. Seems to me that the two conditions are mutually exclusive. If values are high, then the market has supported that level and sustained them, as is the case where houses in the northern CA market, and other places routinely sell for more than the list price. If the market is sluggish, then that is a function of the asking prices being too high to find support, therefore indicating that the high valuations may be headed for a correction. The caveat is to not get caught holding high priced, depreciating properties during the long downward slide of a correction, as anyone who dealt with properties in California or Texas in the eighties and early nineties can tell you. So maybe you should first determine where your market is really headed. I know nothing about Honolulu, but can guide you to the sources that have the information you need. I have done market research all over the Southeast over the years, and there are some fairly easy ways to get an accurate read on local conditions.

To paraphrase an old saw, all real estate is local. No real estate is national. Prices and activity in any market depends almost entirely on your local economy, and may have very little to do with the national economy. But that is not to say that what happens on a national or global level won’t have an impact. One example is if the price of oil goes up to forty dollars a barrel, then interest rates will rise, and you can bet your real estate market will slow down, and you may have a problem selling a house. But for the most part, what is happening in your local economy will determine prices and activity. A growing, or rising economy, usually will result in an appreciating real estate market. Conversely, a falling economy will result in falling prices in real estate as well. There are some key indicators that you can watch that will give you a very good estimation of market conditions in your area.

The best and quickest indicators for the state of a local economy are the employment levels for the area. You can usually get that number from the local economic development folks, the local planning department, or the Department of Labor. If employment growth in your community is stronger than the national average, then your economy is up. If it is weaker, your economy is down. If it is significantly below the national average, then your economy is in bad shape. The numbers to look at are the job growth, defined as the numbers of new jobs created, and the level of unemployment as a percentage of the work force, commonly called the unemployment rate. Make the comparisons on an annual basis only, as seasonal and monthly fluctuations are generally always present, and gain relevance only when evaluated in terms of one year to the next.

The next number to gauge is population growth. Again, the local planning department will most likely have the data, but it can also be obtained from the Census Bureau. If your area is experiencing net population growth, that is generally good news for the local economy. The exception to this is in some older cities where services may be strained by an increasing low/no income population. If population is declining, then the local economy is probably suffering as well.

The next numbers to consider are comparative figures on homes for sale and homes sold. The local Board of Realtors will have this information and should share it with you directly, or in some cases would give it to a member agent acting for you. Compare the number of listings and the number of sales on an annual basis. If the number of listings is going up relative to the number of sales, then the market is going down. If the number of sales is going up compared to the number of listings, then the market is going up. Again, make the comparisons on an annual basis. Seasonal and monthly variations have no meaning by themselves. For example, in most markets, you would expect June to be a better month than February, the relevance only appears when you look at June or February this year compared to the same months last year and the year before. (I prefer three years of numbers.) I don’t put a lot of stock in the number of new housing starts. It can be reflective of an economy, but just as often it can be wildly skewed from one year to the next by other factors. I tend to rely more on the actual sales and listing info.

One last thing that I have used in evaluating markets over the years is the local newspaper. Take a look at the “help wanted” ads in comparison to the “autos for sale” ads, again on a year-to-year basis. In many (not all, this isn’t an exact science!) cases, they will run counter to each other, depending on the state of the local economy. If the number of help wanted ads is going down, and the number of auto ads is going up, the economy is slumping. When the number of big ticket items for sale are increasing, it is a sign that the economy isn’t doing well. I don’t use this as an absolute measure, but more as a check for the other numbers. If you’re not from the area and can’t watch the ads regularly, the newspaper will often give you some comparison numbers as long as they know what you’re going to use them for. Don’t be surprised if they get interested and do a story on being your own economist!

Once you know what the trends and pressures are within your local market, you can then begin to form a strategy as to how to best profit from the conditions. Money is made on economies going in both directions, but only if you understand the actual direction.

Hope this helps,

ray

p.s.

As to your question regarding my background and experience, I have been in some segment of this business all of my life. I started in my father’s mobile home sales business when I was a teenager, got into modular housing as a contractor after college, then into residential development. I went broke in contracting in the eighties, and then got into commercial development. I presently head the family company founded by my father, and owned with my three brothers here in the Blue Ridge Mountains of Virginia. We deal only in properties we own (no brokerage) and are involved in the development and operation of a diversified portfolio of properties that includes hotels, apartments, mobile home parks, and retail commercial projects, as well as commercial and residential development. Over the years we have been involved in hundreds of properties, maybe more. To tell the truth, no one counted.

As to John Reed, the man has opinions and has developed a forum to express them. For that I admire him. As with most folks I read and discourse with, I agree with some of his opinions, and I disagree with others. Irregardless of mine or anyone else’s opinion of him, he has the tenacity and the drive to share his thoughts with any who care to listen, and the market will determine the veracity and value of the effort. It is immutable natural law that in the matter of anyone who presents his or her thoughts as a path to follow, if the information is true and valuable, it will last.

Ralph Waldo Emerson observed that in each generation there are but a few who fully understand the work of the Greek philosopher Plato (I’m not one of them!), but his works continue to be published throughout ages because the essence and truth of his thought demands it be preserved for those few who are to come. Not to say that any of our ramblings about real estate are on a level with Plato, but I think the same premise holds true. What is true and has value will last in the face of all that attack it. That which is based on falsity, or flawed in its construction, will collapse from its own defects.

As a professional and as an individual, I am much more troubled by a person who has no opinion on issues, than the one who has an opinion that differs from mine.

Some advice on a prop - Posted by martin

Posted by martin on December 07, 1999 at 15:23:09:

Hi Everyone,

I need some help. I found this 8 unit apartment building which is being sold for $399K and I need some advice on how I should approach the owners on buying it.

Details:
Personal: below average credit (timely payments, but large revolving balances), no equity (other than car)

Property: Tax appraised value $575K, Asking $399K, seller wants cash, not willing to take a second, $4000/mon rental income.

Should I approach the seller and make an offer, than try to go to a mortgage broker to try to see if they will finance the property just based on the FMV. Will that work? ANy suggestions will be greatly appreciated. Look forward to hearing them…thank you!

Re: Some advice on a prop - Posted by ray@lcorn

Posted by ray@lcorn on December 08, 1999 at 11:05:30:

Martin,

I don’t see the deal here. It’s priced at $50T per unit, which is pretty pricey in most markets not affected by some hyper value factor as in parts of CA. Still, the income doesn’t support the price either… you don’t mention the expenses, but they will run a minimum of 30% of gross, and most folks here would figure them at 40% of gross. At 30%, that would leave an NOI of $2800 per month, or $33,600 per year, which yields a cap rate of 8%. Way too low in my book. Also, I just did that valuation based on pro forma, or “what-if” numbers, which in the real world I avoid doing if at all possible. In order to accurately value an income property one should always use the actual operating results.

I would encourage you to learn more about investing in real estate before taking on a multi-unit property. Trying to structure a no money down deal on an 8 unit building is difficult for those of us with portfolios of properties and years of experience. You will have much better chances of getting deals done through lease options or flips. There are a number of articles on this site in the “How-To” section (click on the link above) that can give you guidance through the many types of properties and deals that you can become involved with. It sounds as if you have the desire, but as with many of us, you may be a bit confused about where to start. Take the time to learn all you can, the education will repay you many times over.

One last piece of advice: Put yourself on a credit diet. Develop a plan to get out of debt as soon as possible, the interest charges alone will keep you enslaved to the credit card companies for a lifetime. It’s just not worth it. There are a number of debt reduction programs available, some are free of charge. Above all, make a committment to yourself to change your habits about credit. If you keep doing what you’ve always done, you get what you always got.

Good luck!

ray

Re: Some advice on a prop - Posted by thom

Posted by thom on December 07, 1999 at 20:25:13:

Anything over 4 units is viewed as commercial property, that usally requires 25 to 30 % of the sale price down and a good credit report.

Re: Some advice on a prop - Posted by martin

Posted by martin on December 08, 1999 at 12:34:51:

HI Ray,

Thank you! What you said makes a lot of sense. I really do have the desire, and do crave learning more information. However, I’ve been taking in information for the past 10-18 months, and have yet to take any action.
The reason I have looked at taking on a multi-unit property is that the real estate prices are so over valued here in Honolulu, Hawaii (recently ranked the 2nd highest in the nation behinf S.F.), where average single family homes range in the $315K - $365K, that it is hard to find a good rental income property. It kind of leaves me no choice but to go into a property where I can get a lower price per unit which multi-unit properties provide.
I have heard a lot about flipping, and don’t know too much about it, but it sounds like a good route to take (at least in my case). My biggest worry is that I might take a property and not be able to sell it for months w/ the sluggish market that we have in Honolulu. Maybe I just don’t have enough knowledge of the subject yet. I think I heard that you could just assign contracts or something, but don’t have any idea how to, or where to start, or even exactly what that means. I’ll surely begin looking into it!
THe more I learn the more I want to begin. I am really glad that there are truely nice people like yourself who are willing to take the time to give a new investor some advice. I really do appreciate it.

Ps: I was just wondering what type of real estate background you had? I have read many of your posting on this site, and it sound like you are very experienced an dknowledgable in the RE field. How long have you been in Real Estate? What type of properties do you own? How many do you own? I hope I’m not getting too personal, I just wanted to know.
By the way, have you ever heard of a man by the name of John T. Reed? I recently read several of his articles, and several of the opinions on him, and quite honestly it made me feel like I just got kicked down a flight of stairs! It’s pretty negative. TElling me that I can’t do what I want to do. Do you have any opinion on what he has to say?

Hope I haven’t taken up too much of your time. Again Thank you very much for taking the time to respond to my message, I greatly appreciate it.

Mahalo Nui Loa,
Martin Z
(future successful investor)