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Posts Tagged ‘distressed property’
Most buyers want to purchase at the lowest possible price. However, price must be balanced against quality. An inconsistent rental income and an uncertain exit strategy will quickly sour a deal that seemed too good to be true.
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In good times and in bad, the lowest prices will always be available in low income areas with poor transport links, low owner occupancy, high levels of foreclosures, high levels of delinquencies on community fees and lots of deferred maintenance.
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Chasing a low purchase price with a high rental yield is what I consider to be a “too good to be true” strategy. Your rental income isn´t going to be very reliable in these kinds of areas. Tenants here are less creditworthy, less responsible and more transient. This will lead to high vacancy periods, high management fees and high repair costs. Finding a profitable exit strategy for that kind of property five years time will be difficult if not impossible.
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The best investment locations, in good times and in bad, are those closest to the best schools, jobs and amenities where young families and professionals rent, live and buy property. For these reasons, they will never be the cheapest properties on the market, but they will certainly be the most stable.
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A person seeking a reliable rental income and a solid exit market should choose properties with the following characteristics:
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1. FHA financing available to owner occupiers
2. Low foreclosures levels
3. High owner occupancy and low vacancy levels
4. Low levels of delinquencies and deferred community maintenance
5. A satisfactory HOA reserve to cover future maintenance work
6. Close to quality schools and major employers
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Junk mail filter
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If you are receiving a dozen emails every week with deals that all look great - just ask the seller to confirm the above and you´ll very quickly find out which ones are duds.
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The six bullet points above are obvious, anybody could come up with them after a few minutes thought. The trick is finding properties that match these characteristics and securing them at a competitive price. That´s not so easy and not many people are doing it.
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There are different levels of risk in real estate, and plenty of ways to earn a living from it. Not everybody will agree with my take above. That´s ok - one size doesn´t fit all in this game.
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However, if you happen to agree with me that the most viable strategy is to buy in locations where people pay their rent and bills on time, where the amenities are well maintained, and where banks are already lending to owner occupiers, then you´re going to love our next product launch. See http://www.torcana.com/newsletter-41.htm for further details.
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In my previous newsletter, I outlined my thoughts on the EU/US crisis and why I felt business in Florida will carry on regardless.
Here are ten reasons why I am still betting on Florida real estate:
1. As of June 2011, there were 10,559 homes available to purchase in Orlando though the multiple listings system (MLS). This is 35% lower than the June 2010 inventory (16,304).
2. If you´re wondering why good deals seem harder to come by this year compared to last year, then look no further than the fact that Orlando condo inventory is down a dramatic 54% year on year. There are only a few hundred available to purchase.
3. The median sales price of a normal (i.e. non-foreclosed) property has increased an incredible 40% year on year, from $112,000 (£68,225) to $158,000 (£96,250). There has been a corresponding drop in the numbers of bank owned properties available in the open market.
4. The current pace of sales is equivalent to just 4.3 months supply, the lowest since 2005. A lot of prospective buyers will say that they are waiting for the bottom of the market. In my view they’ve already missed it.
5. One in five Canadians are interested in US property, according to a new survey by BMO Bank of Montreal. Aside from the Canadian dollar appreciating 18% against the greenback in the past five years, the house prices in the locations they tend to favor (Tampa, Phoenix, Miami) have fallen far faster than the US average.
6. Between March 2010 and March 2011, almost a third of all Florida sales were to foreign buyers, up from 10% in 2007 (NAR). Generally speaking, the USA is still by far and away the largest recipient of foreign direct investment.
7. Orlando´s median home price (which is a good barometer for Florida as a whole) is now $94,950 (£57,850), the lowest level since 1997. Reserve at James Island units are available at this exact price, but I can assure you the quality and location is far above the average.
8. According to a recent report from the Harvey University Center for Housing Studies, 16 million new housing units will be needed to meet population growth and shifting demands. That would mean household formation, currently at 500,000 per year, will need to reverse its recent trend and get back to the 1,000,000+ per year we witnessed in the years previous to the financial crisis.
9. There is going to be a surge in demand for smaller homes, as an estimated 3.8 million baby boomers will be looking to downsize in the next decade. There are an estimated 50 million baby boomers in total and a disproportionate number of these will be attracted to the warm climate, low cost of living and quality of life of Florida. Immigration growth will also continue to stimulate demand.
10. Despite all the turmoil in the markets, there can be few who doubt that Florida is a diverse, wealthy and resilient economy with a safe and secure legal system that has been protecting foreign buyers for decades.
Kind Regards
Colin
The market crash in 2006-2007 resulted in the dramatic falls in property prices among many industrialised nations, but as the graph below illustrates, prices in the USA have both fallen further and stabilised for longer than other major nations.
Property needs to be considered above all at micro levels - you need to know the individual neighborhoods very well. However some important nationwide trends include:
- - The ratio of house prices to rents is now well below its pre bubble level
- - Vacancies are at a three year low
- - Analysts expect rents to rise by 4% this year and next (The Economist)
- - New foreclosures were 18% lower in Q1 2011 than Q1 2010
- - The US economy added 600,000 new jobs between Feb-April and 1.3m new jobs in past 12 months. That is the rough equivalent of the UK adding 120,000 new jobs in 3 months.
- - In Q1 2011, for the first time in 4 years, more mortgage borrowers caught up with their payments than fell further behind.
What are your thoughts?
I´m very interested in your thoughts on the issues and trends discussed in this blog post. Do you agree or disagree with my take on the current market?
Regards
Colin
Due diligence I performed on a low income neighborhood in Orlando
Let me describe one of these lower income communities that came across my desk recently. I did some basic due diligence and number crunching on it. On first glance it looked ok - an Orlando gated community with swimming pool, fitness center, children´s playground etc. Units ranged in price from $38,000 - $45,000 and net yields were 7-10%. Many of Orlando´s main hotspots were within a 15 minute drive.
What´s not to like?
Plenty as it turned out. The HOA reserves were hopelessly inadequate to maintain the facilities and the building structures. Almost 50 of these units were in foreclosure or short sale with asking prices way below what was being offered to me. Average household income was one of the lowest in the city and the crime rate was very high. Most of the leases of the tenanted units had expired or were about to expire. Driving around and through this neighborhood was like something out of The Wire, a gritty TV show based in Baltimore.
Perhaps you´re not too bothered about the condition of the property as long as it´s generating a 10% net yield? I mean, it´s not like you´ll be asking your mother to spend the summer there minding the kids right?
However, you might want to consider the following: the rents will decrease because there are too many vacancies, your HOA will increase because too many people aren´t paying their monthly dues. Your repair bill is going to be high because the properties are nearly 30 years old and these tenants are much more likely to break stuff than those renting in a wealthy neighborhood like Dr. Phillips /Bay Hill. You will also have vacancy periods every single year due to tenants regularly leaving and/or refusing to pay their bills on time.
In other words, that +10% net yield can turn into -10% quicker than you can believe. After all, we´re only talking about +/- $4,000 per year on a $40,000 property.
As for capital appreciation? Forget it. You would do well to sell a property in this community for the same price you bought it for in 5 years time. That doesn´t include the stress it will have caused or the hole it will burn in your wallet every year with those negative cash flows.
Because Torcana would like to continue doing business with you in 3, 5 and 7 years time, we refuse point blank to move down the food chain. This model just doesn´t suit buyers who aren´t local experts and most of our clients live a long way from Florida.
If we don´t have anything available in a decent middle class neighborhood for $70,000, we will promote something in a high class neighborhood for $140,000 instead. It´s a higher purchase price, but it´ll be a big property in a prime neighborhood - i.e. you get what you pay for. It will also be a hassle free purchase that will provide a reliable income and sell at a handsome profit in years to come.
Regards
Colin
The three options facing real estate investors in the Orlando market
Many condo investors, especially those of modest means, are now faced with three options in the Orlando market. The first is that you continue trying to find good value properties in this $60,000 - $100,000 range. As I outlined in issue 38 and issue 39 of our newsletters, this is now extremely difficult due to a lack of supply and oversubscribed demand.
If the first option of purchasing units ranging from $60,000 - $100,000 is very limited, the next obvious option is that you move further up the food chain and purchase higher quality properties located in the best neighborhoods in the $95,000 - $150,000 range.
There is a decent selection of these available to those in the know and they offer very solid cash flow and excellent medium term capital growth. Best of all, they will be the first to provide equity release and resale opportunities when mortgage lending makes its long overdue recovery. This last point is crucial. There is a very strong school of thought that always advocates buying the best properties in the best locations wherever possible.
The third option is you move down the food chain and source properties in lower income neighborhoods in the $35,000 - $50,000 price range. Some of these look like unbelievable bargains compared to what they were selling for in 2005/6. Appearances can be very deceptive with these deals though. Experience and gut instinct tells me that most properties purchased in low income areas towards the end of a recession will generate highly irregular income and will take an unacceptably long time to generate meaningful capital growth.
One of my chief concerns (and gripes) right now is that there are respected companies out there promoting properties for $35,000 - $50,000 in neighborhoods that are just one or two steps up from the ghettos. It´s only a matter of time before a British tabloid publishes an article accusing a big property agent of selling dodgy properties and conning downtrodden families out of their life savings.
Kind Regards
Colin
Top ten tips on purchasing discounted property in Florida
I´ve written this article as a guideline to those considering a purchase in Florida. While property prices are at record lows and incredible bargains are available, it is just as easy to make the wrong purchase decision now as it was during the boom years.
Many of these tips are universal and can be applied to any property market. I would imagine that a lot of our readers would adhere to this criteria automatically but its always useful to present this type of information in an easily digestible format.
Here are my top ten tips:
1. Do your homework on the neighbourhood
2. Visit the property yourself, or have someone you trust do so
3. Check out the rent roll
4. Foreclosures: Make sure the number is manageable
5. HOA Reserves: Make sure they are adequate
6. Budget for repairs and vacancy periods
7.Closing and running costs: Make sure you know what they are
8. Get a decent management company and be aware of all fees
9. Get a referral from the selling agent
10. File your tax returns
1. Do your homework on the neighbourhood
You can look up the average household income and crime statistics for any neighbourhood in a matter of minutes and it could save a small fortune. Imagine that you´ve a choice between one property selling for $50,000 in an area with an average household income of $25,000 and another property selling for $60,000 in an area with an average household income of $40,000. You´d be much better off paying $10,000 extra for a better rental and resale market.
2. Visit the property yourself, or have someone you trust do so
An advert promoting a $30,000 property within 12 minutes of Disney might sound like a no brainer. The thing about Orlando is that nearly every neighbourhood, good and bad, is within a 10-20 minute drive of hotspots like Disney, Universal Studios, Sea World and Restaurant Row.
Like most big cities, great neighborhoods with huge mansions can be less than a mile away from horrible ones with rows of boarded up properties. You need a lot more than Google maps to determine if the location is good or not.
3. Check out the rent roll
If you are buying a pre tenanted property with the aim of earning a regular income, then ask to see an up-to-date copy of the rent roll. This provides invaluable information such as how many units are vacant, what each unit is renting for, when each lease started and when each lease will expire.
4. Foreclosures: Make sure the number is manageable
The more stable a community it is, the better for all home owners. If you are thinking of buying a unit in a community of 300 homes and 80 of them are in foreclosure, you could be in for a rocky ride. These properties will probably be sold for much less than what you´re paying for yours and rented out for less than you can afford to rent yours out for. Try and buy somewhere where less than 10% are in foreclosure.
5. HOA Reserves: Make sure they are adequate
In Florida, all condo home owners have to pay HOA fees which usually range from $200-$300 per month. Your Home Ownership Association (HOA) is responsible for looking after the common areas and facilities of the whole community and insuring the common areas and exterior structures of all buildings (i.e. walls & roofs).
Ask for a copy of the HOA accounts before purchasing a unit. This should tell you how many people are paying their HOA fees and what reserves they have in place. If either of these is inadequate, you could be in big trouble as your fees will be increased dramatically if a) the clubhouse roof needs to be replaced and they have insufficient reserves or b) not enough people are paying their fees to maintain the resort on a monthly basis.
6. Budget for repairs and vacancy periods
All properties, from the very top to the very bottom of the food chain are going to have vacancy periods and repairs that will eat into your income stream. Budget at least one month’s rental income each year being spent on these issues. Older properties, cheaper properties and properties in low income neighborhoods will have much higher vacancy and repair costs than newer properties in middle class and upper middle class areas.
7. Closing and running costs: Make sure you know what they are
For properties priced in the $50,000 - $150,000 range, you should budget approx $2000-$2500 to cover basic legal and title insurance. Running costs include HOA, real estate taxes, property management and home insurance (optional but highly recommended).
8. Get a decent management company and be aware of all its fees
A professional management company that manages your property and your tenants well over a number of years is worth its weight in gold. In almost every scenario, it does not pay to appoint a small inefficient company who undercuts bigger and larger competitors with cheap commissions.
The better your management company is at doing his/her job, the happier the tenant will be and longer he/she will stay. All management companies charge additional fees for placing a new tenant or renewing the lease of an existing tenant, so you should make yourself aware of these and input them into your calculations.
9. Get a referral from the selling agent
If your agent has been in business for a few years, he/she should be happy to put you in touch with a couple of satisfied clients who can verify that they are happy with the service received. This is especially important if you are dealing with overseas agents who are promoting properties in an area where they are not based full time.
10. File your tax returns
All property owners in the USA must file tax returns in the USA every year, even if the property is not earning any income. Overseas residents will need to get a tax number (ITIN) and a non resident social security number. This is a very simple process and filing returns every year shouldn´t cost more than a couple of hundred dollars and there are plenty of specialist companies who can take care of everything for you.
Regards
Colin
Florida - changes between 2008 - 2011
When Torcana first entered the market for distressed real estate three years ago, there was a wide selection of properties available in what I would consider the “comfort zone” of most investors. For $60,000 - $100,000 you could purchase a tenanted and well maintained 1, 2 or a 3 bed condo in a decent middle class neighorhood.
We pride ourselves in our ability to sniff out a bargain and we sold a couple of hundred prime units matching the description above in well established communities like Mosaic at Millenia, Arbor Lakes, Sabal Point & Siesta Lago. A mixture of direct competitors, pension funds, specialist property funds and high net worth individuals all snapped up tens of thousands more in (broadly) similar communities and price ranges.
When you combine that substantial investor activity with improved economic conditions generally, you are are left with a severe tightening of this market segment. While some news outlets are still publishing stories about new foreclosures and price falls, today´s facts are a lot more relevant than yesterdays headlines.
The basic truth is that the number of properties being purchased every month far outnumbers the combined total of new foreclosures plus new builds becoming available.
Recent official statistics confirming inventory levels at 7 year lows (4.8 months worth) and vacancy rates at 3 year lows enhance this argument further.
Those with cash are very fortunate right now because they can purchase properties that less liquid people simply don´t have access
to. When financing does become more widely available for both Americans and overseas buyers in Florida - it will be far tougher to find that bargain.
For starters, the price of everything will increase once the supply of people who can purchase it increases. You needed an average of $70,000 in cash to purchase one of the thirty condos we secured in Siesta Lago (now sold out). If banks were willing to offer 70% mortgages, the price would jump up way over $100,000 and you´d be competing with a far bigger group of buyers to secure one.
Fortune Magazine produced a very comprehensive report a couple of weeks ago entitled “Real Estate: It is time to buy again“. This is a very authoritative publication and to me that headline says a lot more than 100 similar ones in a property magazine or real estate association website. They also published a “Top Ten Cities for Home Buyers” index.
Florida had 3 in the top 10, with Orlando ranked number 2 nationwide. That´s a pretty big thumbs up for the Sunshine State in my book.
Colin
If you were so inclined, it would be quite easy to do a Google search on ALL the resorts we sell in Florida and quickly find what looks like a similar property in a similar area for a much cheaper price. Once you find the actual seller, you might even be able to negotiate a slightly better deal for a quick cash sale. In my humble opinion, the chances of making a profit on these deals is probably similar to a rookies chances playing a professional poker player - they might win a couple of hands, but eventually they´ll lose.
I´ll be the first to admit that we are not a one size fits all company. A lot of what we promote won´t be suitable for sizable chunks of our database. We might launch something at $130k when your budget is $90k. The net yield might be 7% when you actually need 9%. It might be in Orlando when you´d prefer Miami. All perfectly understandable.
Whether or not a new launch suits you, you can rest assured that we´ve done our due diligence on it. I will be able to tell you when it was built, what materials it was built with, how many have been sold, who has been buying them, what rents and occupancy levels are being achieved, all the hidden running and closing costs, what the accounts and reserves of the home ownership association look like, the history of the real estate taxes in each unit, its proximity to important schools, offices and attractions, bulk buyers that have previously been involved …. and much else besides.
It is this knowledge that ensures our buyers get a solid deal, not the cash they have in their bank accounts.
Colin
A staggering 20 per cent of all Canadians would now consider buying property in the USA, a new survey from BMO Bank of Montreal, conducted by Leger Marketing, shows.
Lower USA property prices and a strengthening Canadian dollar have fuelled greater demand for homes in the States.
Average property prices in the USA have declined by around 30% since the market peak of 2007, but prices in Canadian snowbird destinations, including Florida, have dropped even more.
According to the report, Miami property prices have fallen by 49%, while greater property price declines have been recorded in Phoenix (-54%) and Las Vegas (-57%).
“Now, with the American economy and employment gaining strength, home sales should pick up and put a floor under soft prices,” said Sal Guatieri, senior economist, BMO Bank of Montreal. “We expect prices to rise over time as the overhang of unsold homes eases.”
Guatieri projects that the U.S. dollar will strengthen in the next few months, which would add to the investment potential for Canadians who buy property in the USA now, as they would realise larger returns, should they choose to sell their USA property and repatriate funds back to Canada.
Overall international demand for homes in the USA is growing among property investors across many parts of the world, which could eventually help push property prices higher.
