Originally posted by Tyler McCracken on 11/10/2009 on www.askthelandlord.com

You Can’t Handle The Truth!!! When will this (real estate) elevator hit the bottom??? Part I

I’ve just come through a two week period were the realities of my world hit home as I downshifted into another phase of my real estate operations. Anyone who has been in the world of real estate merchandising (whether it be flipping, wholesaling, prehabbing, and/or rehab to retailing) who has had inventory during the great real estate downdraft and credit freeze knows that it’s been tough… The ability to move property (inventory) has been challenging to say the least. Couple these challenges with rentals and a toxic level of debt and you’ll know someone playing much more defense to stay alive then one playing offense and taking advantage of the opportunities.

Sure anyone can spout it’s a great time to buy (or we had better hope….huh?)… The Guru’s will hype that at $699… as even they have been impacted by less sales and have thus lowered their program costs from $999…. Just remember the guru’s are pushing Xerox paper not property. If you’ve been in the real estate business you’ve been affected. Whether it’s as simple as being maxed out by the 4 loan limit, a 1.25 to 1 debt ratio and/or a self employed real estate investor for commercial loans, over-leveraged rentals, loss in rent pricing power, empty inventory that cannot sell, or a plethora of other issues in our world, one cannot as easily take advantage of opportunities that may present themselves. We are challenged not only financially but psychologically too.

What no one really wants to talk about is the realities of what we’re facing. Average sales volume across America is down a good 25%. Locally we’re down some 33%+. Truth be told actual sales volume is down a good 50% since the highs of 2006. This blog should actually be Part II (but I was late to the world of blogging) as Part I should have been this time last year. You see for my area (Charlotte, NC) -it hit the fan when Wachovia fell apart at the end of September 2008. Our town ground to a halt with resulted depressed prices. It was at that moment that the elevator began its rapid decent until some friction was felt around February, 2009. The Schiller report will say our region is down some 9%….. I say that is false. Now remember everything is local, as I will state that our real estate pricing/values are down 10% to 50% depending on what market and/or neighborhood your marketing property in.

Those least affected are niche markets most correlated to entry level housing in the $90k to $190k pricing range, closer to downtown, that attract first time home buyers typically starting out in their professional careers… Those properties hit the hardest are in entry level vinyl villages (primarily targeted to sub-prime buyers), furthest reaches of the suburbs, lower income neighborhoods, and the upper end $750K+ housing market. Anyone who deals in property professionally realizes that one should move property at least within 90 days; to do that you’re looking at a downdraft in valuation on a Charlotte average of 20-25%. Yup, I’m stating that our market is down 20-25%. Know if you had inventory during this flux –sooner or later your going to have to pay the piper. Either you take the hit now and move on, be dragged down by debt, and/or lose any return on investment by hanging on for some unknown time. I’m in the camp of taking your lumps sooner, digesting the problems, and moving on to better times. Further delay only continues your misery in the world or real estate merchandising. Rentals can be a different story.

I think Charlotte in particular was hit with a double whammy. You see we really didn’t see much of a down draft in real estate until August, 2008. Sure there were some signs here and there but no momentous percentile changes. The credit/financial freeze of the fall of 08’ literally took the breath out of us…. As a result it was a free-fall.

I won’t argue that there are pockets in and/or locales that are achieving positive results (at least temporarily), but what I will caution is that one needs to look at their goals and how one is going to achieve those goals? Does it require debt to leverage the machine and thus volume to achieve the desired income? Then caution. To achieve any type of continuous successful volume in real estate merchandising during this time of fluctuation requires great risk both known and unknown. Hold a GURU to the same standards that one should hold a broker too. When you look at buying a business doesn’t one require financial statements let alone tax documentation? YUP! I even know those that won’t hand a dime over to a stock broker without looking at their numbers to see if they are up to par. The fact is that most can’t handle the truth. Most don’t have any success in volume (thus income) and certainly cannot substantiate it. I urge you to hold those that prophesize the secrets to unlimited wealth to the same standards any smart business man/women would put upon any other opportunity. Truth is most real estate wealth machines available on the market do not work in today’s environment. Remember: They make wealth by selling you Xerox paper and CD’s.

The same goes true from knowing all of those you seek advice from in your market! Really -trust but verify.

Don’t believe me that the headwinds of the trend are against us? Every day I am seeing small real estate investors, attorneys, appraisers, surveyors, lenders, Realtor, general contractors, and even commercial builders and developers go out of business. Done. Caput. Zip. Nada. Game Over! It is shocking and if it doesn’t have you wondering if you’re next it should if you have a high overhead requirement and/or debt level. It has certainly made me second guess my moves many a time.
Don’t let me scare you; however, if you’re not awake you need to be for fear of losing your shirt.

SO WHERE ARE THE OPPORTUNITIES!?!

Let me tell you they are out there. The greatest way to solidify you odds of success is to buy income (rental) property with the longest term fixed financing you can get. The longer you can hold…, the longer your tenants can pay down your mortgage, and thus, the improved odds of rent and price appreciation while our economy heals. Can you make money flipping? SURE! However, if you get stuck holding you’ll want to have an eye bent towards cash flowing if the flip doesn’t work; otherwise, be prepared to take a loss to move the dead weight.

You need to stay nimble. Why hold a 100K property if you can move it with a small profit, break-even, or perhaps even a loss? You could take that same $100k capital and go out and buy 1 ½ to 2 homes as a replacement –it doesn’t take a rocket scientist to figure out the cash flow greatly improves keeping it at just that simplistic thought.

So has the elevator stopped? Your guess is as good as mine. I don’t believe in market timing; although, I do believe we’ve got a good 5-10% more to fall (at least locally). And PLEASE, I hope I’m wrong. I also believe that now is a good time to buy as will the next 2-3 years. Will there be opportunities of a life time? Are they out there now? You bet they are out there. Why? Because of fear! That simple- when one breaks it down. Build your portfolio slowly and build it right with good financing. You say you can’t get a bank loan? Think owner financing!!!

Folks I’ve said it before and I’ll say it again. Owner Financing! This is the way you will acquire more cash flowing properties during a low point in the cyclicality of the real estate market. What goes down comes up and vice versa. We are at 30-40 year lows in interest rates and have hit a 20 year bust out in real estate valuation –sooner or later the trend will be like the wind at your back. Remember: Real estate is a long term game of compounding. Compounding of a mortgage pay down (with the goal of tenants doing this part), compounding of depreciation against other income (for an improved overall return after taxation), and the icing on the cake: appreciation.

The truth is we all got spoiled!!! If you participated in any of the run-up’s in valuation (no matter what asset class you invested in), then sooner or later you fell victim to the expectation of return minimums. Truth is nothing goes up in a perfect line and everything (and I mean everything) goes through up & and down cycles. Always take some cream off the top all along the road of life. Fall back to the old adage that real estate typically doubles in value every 17-18 years. That’s not so bad is it? I’d be happy to have a $100k rental be worth $200k in seventeen years. I’ve made mention of this in my blog post: A Way To Wealth with Rentals… . The truth is most wealth is created over time. Instant wealth occurs when you marry it, inherit it, win it, or receive it via stock options; all others, need to be prepared to work for it and let the amazing science of compounding create a rolling stone that’s hard to stop over time.

Focus on cash flow. Buy it right, finance it right, don’t over leverage it & eat the equity, manage it, and sit back and let time work for you. Focus on that and sooner or later you’ll realize that elevator stopped its decent and perhaps, is moving on up for you.

Share

David Doyle Comment by David Doyle on November 11, 2009 at 9:00am
Delete Comment Very well spoken and oh how true. The get rich quick tribe has run out of the building. Now it’s back to basics.
Jaya Comment by Jaya on November 11, 2009 at 6:53pm
Delete CommentVery well written. I just follow it to the T.Today I made an offer on a property for 85k. Market value 175K. Imediate rehab 10K. Potential rehab 12 K (add two bedroom). Rent 1000$ with 10K rehab. Rent 1300$ with 22K rehab. May go with 10K rehab since I want to save cash for future purchase. Appraisers are brutal here. They are artificiall degrating the market. (Taking comps from bad school district properties for property in good school distric. It is downright illegal and fraud)

It is excellent school. Market downturn didn’t affect much in this area .. may be 10%.

I closed on a property yesterday Row house 2/1 1050 Sq ft Got it for 75K. Market value 150K. Will rent 1200$

Tyler - NC Comment by Tyler – NC on November 14, 2009 at 5:22am
Delete Comment comments originally posted in the www.askthelandlord.comforum section to this blogpost.Replies to This Discussion

David (M0) Permalink Reply by David (M0) on November 11, 2009 at 6:19am
Tylor, I didn’t read your whole blog but two things that stuck out to me were I have a 110,000 flip purchase that I am trying to break even on. Sell and buy 2-3 cash flow propeties. I talked to a new bank to me and they will loan me up to 400K to move some loans from another bank to thiers with a 10 yr fixed 6.25 it will cost about 400.00 in title fees per home. In house apraisals, I was really impressed with this loan officer. Can you think of anything else i should consider, any commets welcome.

▶ Reply to This

Steve – FL Permalink Reply by Steve – FL on November 11, 2009 at 6:15pm
Great post Tyler. I think we’ve hit bottom or at least the ball is bouncing lower to the ground now. Your post prompted me to go look up a couple of houses that were under-priced a few weeks ago. Sure enough, they sold for asking prices. Plus a few went much higher than I would have thought.

I’ve recently had the opportunity to meet several local investors and have been surprised at what they don’t know about our area or even RE in general. And at the same time I now see how easy it is to find folks willing to borrow to invest. It’s kinda’ sickening to see values where they are today which is pretty much in line with your area; even the price range take is very nearly identical. My question all along has been what happens to values if people cannot get loans. Locally, OO isn’t bad but investor loans are nearly impossible. I think until investor loans (business and property) re-start, there won’t be much of a recovery.

▶ Reply to This

Tyler – NC Permalink Reply by Tyler – NC on November 11, 2009 at 6:21pm
Delete
David…, that’s a compliment from a bank during these times; however, the 10 year amortization is a bit tight. I’ll assume it meets your needs though and creates fantastic wealth accumulation over time -as you know. The biggest issue that comes to mind is that this is probably a blanket loan secured by a group of properties…. you may want to get your bank to agree to certain dollar amounts to release each property if you were to desire to sell one (or more) down the road. I will tell you’ve I’ve not done the carve outs (although I should ask).., typically they’ll release what I want for an amount I suggest. The other fun thing with commercial loans is I can swap properties too…. perhaps I sell one and then throw in a new property as new/additional collateral. These offer great flexibility. The only other thing is the Balloon date? is it termed out to 10 years or is it a 3/5/7 year balloon? I would suggest asking (attempting to negotiate) to a 15 year amortization or extending out the balloon date.

Sounds very promising.

▶ Reply to This

Tyler – NC Permalink Reply by Tyler – NC on November 11, 2009 at 6:35pm
Delete
Steve.., I’m hoping your thoughts are right; however, I’m concerned our recent stabilization is a result of the push over the past 2-3 months for ‘First Time Homebuyers’ to buy the great opportunities prior to the $8k credit expiration formerly anticipated to expire 11/1/2009 and the enthusiasm shared by all with the run up in the stock market…. Perhaps, I’m wrong but I feel we’ll find great headwinds at least through 4/30/2010 if not the entire 2010 year.

What I’m trying to get a handle on is that from what I can tell is that 1.2 million new household formations per year were created from 1996 to 2006 yet an average of 1.7 million homes per year were built. That would mean an excess of 5 million homes were created by 2006. I believe this with all the speculation with speculators just sitting on empties (not even bother to rent) awaiting their time period to flip. As of late we seem to be creating @500,000 home per year…., assuming we’re still creating 1.2 million new household formations (yet you’ve heard about doubling up) we’ve got a good 7 years to go to absorb the over supply. That would peg us with conservative thought and no more run up of more new homes built per year (than 500,000/yr) out till 2013-15.

What is important is what is the over supply in your area? We do know there are certainly concentrations in CA, FL, AZ, NV…but what amount? We do know that 60% of year to date foreclosures are in 6 (of our 50) states…so we can gather where the over supply really is and thus perhaps our local areas aren’t as dire as i imply; however as you mention, until financing/credit stabilizes -we will see continued drag.

Doesn’t mean this isn’t time to buy…, just means to go slow. In my opinion.

Steve – FL said:

Great post Tyler. I think we’ve hit bottom or at least the ball is bouncing lower to the ground now. Your post prompted me to go look up a couple of houses that were under-priced a few weeks ago. Sure enough, they sold for asking prices. Plus a few went much higher than I would have thought.
I’ve recently had the opportunity to meet several local investors and have been surprised at what they don’t know about our area or even RE in general. And at the same time I now see how easy it is to find folks willing to borrow to invest. It’s kinda’ sickening to see values where they are today which is pretty much in line with your area; even the price range take is very nearly identical. My question all along has been what happens to values if people cannot get loans. Locally, OO isn’t bad but investor loans are nearly impossible. I think until investor loans (business and property) re-start, there won’t be much of a recovery.

▶ Reply to This

Jaya Permalink Reply by Jaya on November 11, 2009 at 7:01pm
Very well written. I just follow it to the T.

Today I made an offer on a property for 85k. Market value 175K. Imediate rehab 10K. Potential rehab 22 K (add two bedroom). Rent 1000$ with 10K rehab. Rent 1300$ with 22K rehab. May go with 10K rehab since I want to save cash for future purchase. Appraisers are brutal here. They are artificially degrating the market. (Taking comps from bad school district properties for property in good school distric. It is downright illegal and fraud)

It is excellent school. Market downturn didn’t affect much in this area .. may be 10%.

I closed on a property yesterday Row house 2/1 1050 Sq ft Got it for 75K. Market value 150K. Will rent 1200$ Rehab cost 15K. This property is in Philly’s old money location. Location is EXCELLENT.The neighbor brought the samr layout property for 162K in 2008.

Loving the opportunities but worried that I am too fast….

▶ Reply to This

Tyler – NC Permalink Reply by Tyler – NC on November 11, 2009 at 7:19pm
Delete
jaya…, sounds like your doing well. I will say that the big thing that jumps out at me in your posts is VALUATION. I’m curious to how your defining it? Don’t take as an insult -just that through the ‘typed word’ its hard to delineate at times if we’re talking apples to apples….

when you say you bought for $75k and its value is $150k…. are you certain your not quoting a valuation at the housing markets peak? are you certain it could sell for $150k today fixed up? If so the good. If not, be prepared to hold for an uncertain time till we heal our wounds in the housing market…. we may not see 08′ valuations again for some 2, 3, 5, 10, 15, 20 years -as there is no guarantee…. again, focus on cash flow and sooner or later we’ll get our icing on the cake: appreciation.

▶ Reply to This

Jaya Permalink Reply by Jaya on November 11, 2009 at 8:04pm
Tyler,

I look at comps not only for the last 6 months and comps from 2001 to 2003. I have MLS access. For that 75K property, there is zero property in that location less than 190K. The properties that are less than 190K are in high rise building with 400$ monthly condo fee. I am pretty sure that that property will sell for 150K.

Banks are so strict now. 70 LTV, 6.35%, 20 year conventional loan with .5 points for cash refi.

I discuss my deals with my local investor friends. They marvel at it. As you know I do lots of research. I spend atleast 2 to3 hrs a day to know the market.

Know-a-days, when I buy properties, I need to have two escape routes ( as a rental property or flip property). In our area, RE market is not bad if the property is <200K.

I am scared too. I have 3 rehabs going and one is going to be closed on January 15th.

Know-a-days, I am asking for longer closing dates to drag some time. For the last 3 years, I hardly brought any property from March to september. Slow time for deals…..

So far this year, I brought 6 properties.

Jaya

▶ Reply to This

Steve – FL Permalink Reply by Steve – FL on November 12, 2009 at 3:10am
Jaya, you’re doing the homework to figure this stuff out; do you also look up property movement in public records? The reason I ask is out of at least a dozen or so Realtors I’ve interacted with over the 3 or so years, “only one” did so to the degree that I find necessary to correctly call values.

We have our GA home on the market at this moment and interviewed 3 (or maybe 4) different Realtors. Each had a rough time coming up with a CMA that was in line with what I knew it was. Each wanted to start out at $200k…which we both knew was at least $25k out to the heavens. And even at that, probably priced too high. They came up with all sorts of comps, many of which simply didn’t match at all. But they, each one of them, missed the single property about 8 or 9 lots away with an identical house that had sold about 6 months earlier. I mean identical in nearly every single way.

The reason, “it was not sold through the MLS” and therefore missed by each Realtor. If you look at deed transfers at the county, you’ll see the entire story. Even following new mortgages (re-fi’s, etc.) will tell you Lender confidence in the area. There’s a wealth of information there once you get used to the terms. I follow a few successful investors (via public records) in the area that are still making $30k plus on flips…even in this market.

▶ Reply to This

Jaya Permalink Reply by Jaya 1 day ago
I look at public records and MLS. I look at houses sold for last 10 YEARS in the school district/Township. I look at the rental valuefrom MLS and Craigslist. I study each house (on the street)’s MLS description for any negative and positive points. I go to county’s database and look at the property zoning, features…..

The property that I brought yesterday for 85K. The same property sold in 1980 for 80K. So I am doing OK.

Jaya

▶ Reply to This

Tyler – NC Permalink Reply by Tyler – NC 1 day ago
Delete
i figured you had a handle on it jaya based on our conversatons over the past years…. good going. Great content on this post….

▶ Reply to This

Steve From Texas Permalink Reply by Steve From Texas 1 day ago
Great Blog! You make me think we are in this for a long time. my kids college fund, my retirement fund, and my wife spending account prays you are wrong. We Can’t afford a long time recession! Hopefully Tenants will at least get part-time work when unemployment runs out. You gotta eat!

▶ Reply to This

Tyler – NC Permalink Reply by Tyler – NC 1 day ago
Delete
hopefully i’m wrong steve.

Michael Perry Comment by Michael Perry on November 15, 2009 at 4:27pm
Delete Comment Another excellent posting, Tyler.

Add a Comment

Written by Tyler McCracken

Local Real Estate Investor & Hard Money Lender in Charlotte, NC - Read Bio at our "About Us" page on the top right of this page.

Leave a Reply

Your email address will not be published. Required fields are marked *