What are you investors doing about the national dropping of property values?

[missjen]

Its all over the news (figures) and I was curious if you are still buying properties, and what you look out for (if anything) to protect your investment from the property value decreasing?

[JaredfromIndiana]

I am still buying at this point.  As property values go down so does your purchase price.  I know I can't get $100,000 today for a house that sold for that 2 years ago. 

[fdjake]

Not only are prices going down nationally, but that decline will accelerate in 2008.   

This correction has a LONG way to go.  Based on my research we're about 2 years into a 5 year correction. 

I specialize in buying single family homes at BIG discounts.  Even buying a home at a 50 cents on the dollar and selling at 80% of market value I am starting to see these homes sitting for longer and longer periods of time.  That tells me my market is continuing to fall.

People are waiting for the bottom of this market.  This is an easy thing to do when your reading DAILY about housing prices falling, inventory rising, and credit tightening.  Eventually perception BECOMES reality. A house, like anything else is worth EXACTLY what someone else is willing to pay for it.  If collectively, people believe that a home will be worth less if they wait..... in most cases, IT WILL BE.

This is the exact spot in the market cycle where investors can get really hurt.  BE CAREFUL.  Have an exit strategy and a back up plan.  I hope your buying these properties at HUGE discounts.  If your not, your playing with fire.

My fear is this will get much worse than ANYONE predicted.
I hope I'm wrong, but I'll PLAN for being right.

The upside of this mess is you CAN buy properties at big discounts because so many people realize how bad things have become.  It's not easy buying homes at 50 cents on the dollar when every night on the news your hearing about the SOARING real estate market (2005)  Now the story (as always) has changed.  People are willing, and in many cases have NO CHOICE, but to DUMP these homes.  I wouldn't want to be buying this stuff with all the equity in my own home.  But I'll galdly use my cash reserves to "cherry pick" some screaming deals!!

The biggest mistake anyone can make in this market is NOT knowing EXACTLY where your selling price is.  EVERYTHING you do should be based on a REALISTIC, DISCOUNTED, selling price.  It's simply a matter of backing out your acquisition, holding, and repair costs from that number.  I leave money on the table in EVERY home I sell.  I want to be THE CHEAPEST home in that category and neighborhood.  If I can't be, I DO NOT buy.

FINALLY.........Don't make the mistake of turning these homes into show pieces.  Clean them , repair what needs to be fixed, install new flooring (PRICELESS) and paint.   THAT'S IT.   I try to limit my rehabbing costs to under $10,000 on a $100,000 home.  I DO NOT buy PROJECT homes.  A project home is something with severe water damage, termite infestation, major structural problems, ect.  I've been a GC for 20+ years,  I can buy and sell 4 homes in the time it takes me to do one PROJECT house.  FORGET IT.  Even at a blow out price it's WAY more work than I do on these $10,000 specials.  Lipstick and rouge, folks.  LIPSTICK and ROUGE!!!

SIMPLE AS THAT.

[MichaelQuarles]

fdjake... Great advice...

I just want to add that when you look at values, look at what the value will be when you actual sell the thing and then make your discounted offer based on that number..

As for repairs of market requirements the steeper the resell price the less you’ll need to do but you should have interviewed the neighborhood to determine buyer requirements before you purchased this home.

As for the amount to spend on a Lipstick. I try and keep to a very minimal number.  I want to be in and out for no more then 5k and I am happy.

Here is what I will typically do to a house...

1) Paint exterior corner to corner (street side) if necessary

2) Remove Old carpet leaving tack strip  3 carpet samples for the buyer to pick from, all a brown tone.

3) Repaint the interior.. I use the same color every time

4) retile Kitchen/bath floors with .80 cent tile

5) Remove old Stove and give allowance

6) Remove tubs and re tub if needed

7) Change out toilets 95% of the time

8) Replace vanity with cabinet sink combo from Lowes or Home Depot 125.00 95% of the time

9) Reswitch and replug all outlets Always

10) replace ceiling fans with 20.00 fans

11) replace all light fixtures with standard fixtures.

Happy Investing

Michael Quarles

[propertymanager]

This correction has a LONG way to go.  Based on my research we're about 2 years into a 5 year correction.

Fdjake,

Have you seen a chart or have other data that shows that it will take 5 years to get to the bottom of this market.  I'm not disagreeing, but the charts I've seen show that it typically takes 2 years to get to the bottom and then another 8-10 years for inflation adjusted prices to reach their previous inflation adjusted highs.   Obviously the runup of prices was historic and unprecedented, so we can expect the decline to also be historic and unprecedented.  However, I would just like to look at any data you have that I haven't seen.

Missjen,

I agree with Jared and Fdjake.  This real estate bust may be a once in a lifetime opportunity, but buying at extreme discounts is mandatory.

Mike

[fdjake]

Michael Quarles,

Great advice on the paint and carpet.

Hey try this next time your trying to save yourself a LOT of money on a bathroom rehab.   Forget that 89 cent tile. Those old tile bathrooms are built like Sherman tanks!!  That tile was laid into a full inch or more of concrete mud.  Todays tiles are basically just glued to the walls and floor.  Your better off doing this..... I have a RE-GLAZING company go into those old pink and black bathrooms and glaze all that tile.  I can get 2 different tile colors (one for the floor and one for the walls) and the tub done (White) for less than $500.  It takes them one day.  The great thing is you never demo anything in that bathroom.  Like you said, replace the toilet and vanity, and you have a 3 day $900 bathroom remodel that looks like you spent $15,000 on it.  (Glazing is just a term for urethane epoxy paint.  The stuff is as tough as nails and can be touched up in the future if the new owner needs to)

Propertymanager,

My 5 year cycle theory isn't based on a chart I saw.  It based on some economic events I see coming.  The country is going into a recession (OFFICIALLY) sometime next year ( I personally think we're there already).  That will bring us through year 3 of this decline (IMHO the market started correcting in 2005).  If past recessions are any indication it should be followed by falling or stagnate housing prices for 18 months there-after (recessions SCARE people) They generally don't run out and drive up housing prices at this point.   That brings us close to the 5 year mark.

[aak5454]

I'm focusing on operations (keeping rentals full) and pay down debt.  As a part-time investor I feel no pressure to do deals.  Turbulent times like these can yield some fat deals, but can also crush you.  I personally believe there will be better deals to had in 12 months so I'll just sit on my cash until then.  I only do a few deals per year so I'll pick and chose very carefully in the months ahead.

History suggest it will take another year or so for this to "un-wind", but the real unknown is how long the stagnation period will last afterwards.  That period will be very un-even nationally (i.e. very regional) as some areas will recovery quickly becuase of external catalyst and others will remain depressed.

[rookieNYC]

Be fearful when others are greedy and greedy when others are fearful....

When the blood hits the streets it's time to buy..I'm continuing to watch for great deals that have high yields...I firmly believe that if you are highly liquid and continue at a measured pace carefully buying solid deals there is no better time to get started...Buy em when they hate em...

[tatertot]

If prices were actually going down, I'd be looking for something to buy.

I buy and hold, so would like to put a few more nice properties into inventory at a really good purchase price.

My schedule was to sell the house I am in this spring and use the profits to build 2 new frame houses on land I already own. That's a wait and see. I won't sell if I can't get my price.

We are used to deep price cycles around here. When the cycle is at a low, then you buy.

Prices going down is a very good time to fix and flip. You can get houses that need less work. Sellers are more anxious and willing to take lower offers.

Locally, about 125 houses a month are still selling (it's a small town), so there is no reason that a really cute house, presented right, and priced just under market wouldn't sell.

Local banks are still providing financing for OO, which is who you should be selling your fix and flips to.

[MichaelQuarles]

Jake most of the homes I deal with are Concrete foundations and rarely have tile floors or counter tops... Lino is typical with coving along with Formica tops... Yuck.. So we pull the tub and insert a new one, wonder board the tub/shower walls install 4x4 cheap white tile on the walls and like I said 80cent tile on the floors. 

Everything we do we use the same material on each house except the carpet... If I have to go back in a fix or repaint something we know exactly what we used before. Besides when lowes or home depot have a sale on light fixtures or ceiling fans we buying them out.
An investor will learn the hard way when they forget what color they painted something to use the same colors always… Besides storage of paint cans is a hassle.

I have my own labor and can be in and out in a few days.. No headaches with scheduling sub contractors who will age and investor way too fast.

Michael Quarles

[allagash]

This is the exact spot in the market cycle where investors can get really hurt.  BE CAREFUL.  Have an exit strategy and a back up plan.  I hope your buying these properties at HUGE discounts.  If your not, your playing with fire.

fdjake...

I know you're no longer big on doing residential rentals....but at some point, (in this downward market), do you see that it's a matter of not being able to beat a dead horse?

In other words, postponing the quicker conversion into cold hard cash via flipping....and instead holding as a rental till the cycle rebounds.

-Mike

[Dave T]

I specialize in buying single family homes at BIG discounts.  Even buying a home at a 50 cents on the dollar and selling at 80% of market value I am starting to see these homes sitting for longer and longer periods of time.  That tells me my market is continuing to fall.

fdjake,

Are your buyers getting new purchase money loans?  If so, would you speed up your turnover rate if you sold on contract for deed or with a wrap-around mortgage? 

[fdjake]

Based on previous experience, (investing through the real estate crash of the late 1980's) I've seen this movie before.  Here's what I'm doing and why. 

 I buy starter homes in this type of market.  There are numerous advantages to this strategy......

First,  I'm never waiting for someone to SELL a home inorder to buy one of mine.

Second,  there are ALWAYS first time home buyers in ANY market.  ALWAYS!!!! Some are new buyers. some are down sizing their homes because of economic reasons.  Either way, it's like selling used cars during a recession.  VERY PROFITABLE!  I NEVER sign a P&S with someone downsizing who has not sold their home already.

Third,  there are numerous programs available for financing for the first time buyer at the local and federal level.

I'm an investor, not a bank.  I DO NOT need to, nor do I want to, finance people for the purchase of these homes.  I can make more money converting those profits into an ever growing portfolio of commercial real estate.  Screwing around with lease options or owner financing actually would cost me money compared to the returns I get when I build a new commercial building.

Here's my bottom line.....  This year (2007) I have bought and sold 8 single family starter homes.  My average profit on each one was $44,000 NET. (average selling price was just under $200K) I never received a single phone call at midnight about something that broke, I never had to evict anyone, I never had to deal with an insane tenant, I never had to rehab one of these homes for the 3rd time because it was destroyed by a tenant.  I missed out on all the BS that goes with residential rentals and made over $300K.  I DO NOT live on any of this money.  It all goes into other investments.

I have absolutley no intention of buying ANY residential homes and renting them.  Been there, done that.  I'll pass.  Buy 'em  sell 'em and turn those profits into more commercial real estate.  The only thing I see changing for me is I will be paying less for these homes.  They will take a little longer to sell.  Last one I had was the longest "on market" in 5 years......
70 DAYS!!!!  Most of my stuff sells in 30 days.  I price this stuff VERY aggressively.  As I've said before, if I can't steal it I walk away.  Too many apples on the ground, no need to climb the tree.

The bottom line is this......I got burnt out on the "VELVET HAMMERS".  When you get to that point you can do two things.  Sell 'em all and find something else to do, or change your strategy and move into another area of real estate.  That's what I did.  No two people are the same, what drove me crazy might be a slight annoyance to someone else.  I have found a very nice niche with my commercial properties.  It's relatively easy FOR ME because I build them myself.  It may NOT be as easy for someone else.  That's what's GREAT about real estate.  We have hundreds of people here all putting their own individual spin on the same business.  No one is right or wrong, just different. 

 If your making money, your right!!

[allagash]

Fdjake,

Thanks for the add'l advice!

As usual.....very usful.

-Mike

[rookieNYC]

I just came across a very good article from a popular economist...I'm not sure if I'm breaking forum rules by posting this article,so if I am I apologize...In short it's comparing the upcoming recession/real estate crash to what happened in Japan in the 90's...And if anyone remembers that it was bloody beyond belief..Real Estate prices in Japan reached ridiculous levels as did the Nikkei only to melt to 20 year lows...All the same Japan has recovered somewhat but the Nikkei is still a little over %50 below it's all time high...IMO a hedge into the Nikkei is in order for savy investors for the next couple of years..Sorry if I derailed the conversation but these are ideas that I'm implementing at work and figured I would share thoughts with the forum..I always thought that the US would follow Japan in having it's bubble burst..I think our situation is far worse because American's as a whole are undisciplined,spendaholics who don't have any savings/backup funds for the most part..That's why this scenario could make Japan's recession look like a trip to Disneyland..I can't wait to see all these SUV drivers losing it all..This has been a long time coming for the people who used their homes as ATM machines and made stupid purchases instead of creating income with the money...I have no pity for those that will suffer..

http://business.timesonline.co.uk/tol/business/economics/article3111659.ece