Bellingham Investors Blog

My answer is is a qualified "Yes" (I am using Bellingham WA stats for my analysis - so check your local stats) There is an opportunity resulting from the absence of financing for development land and new residential and multifamily projects. 

Like a great storm, a combination of disparate events is creating the potential for a market shortage. Permitting for new homes and condos has almost ceased in Bellingham.  The obvious reason is lack of financing for projects, along with a complete absence of financing for vacant land.  On the surface we would say that it is not a big surprise. Bad market!

However, construction costs are at a 10 year low. Development worthy land values are at rock bottom. The market for affordable housing is balanced (in Bellingham) with less than 6 months of inventory.  Less than 10% of homes listed in the $200K to $300K range are newer than 2005.  Average age of the home on the market is 20 years.  Average price is $174 per foot. So what we hear from builders is ”If we could just get financing…”

Wait it gets better!

Home affordability is the best it has been in 15 years. This is due to great interest rates and low prices. As an example, in the Bellingham residential market ($200K to $300K) there are 164 listings and only 23 are newer than 2005. Only 6 are 2011. Sales are running at 31 homes per month at an average of $165 per foot. This is less than a six month supply.  This shows a healthy market.  Buyers in this market are 1^st time buyers and the occasional investor.  The estimated monthly payments for a 1^st time buyer start at $1440 per month with 20% down and $1600 per month with 3.5% down.

Multifamily is equally strong with a vacancy rate of 1.5% reported this summer. Rents are projected to rise and vacancy levels will stay low.

Why New Construction?

There are many advantages to new construction. Buyers have the benefit of a warranty and no deferred maintenance to deal with.  New homes are more efficient and less costly to operate.  Buyers may be able to choose custom finishings and important features. The funds required to acquire a new property are often less than existing homes.

We have many talented builders and developers choked not by the market but by their bank!  Our first projects are going well. Contact me if you wish more information.  The devil is in the details, but investors can seize a moment of bank and market weakness, low inventory, low interest and burgeoning demand.   Send me your thoughts and questions.   

Doug

Phone or text 360-920-1114 or email doug@dhfoster.com

Stock Market verses Real Estate - Right Now!

(I first published this blog on June 10th.) Based on events today I thought I should republish it. The logic here is unassailable when applied to a US principal residence.  I have to laugh looking at the assumptions that investments would go up at the same rate as depressed prices on homes.  I will add investment properties and 2nd homes in an update.

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A client has 100% of their substantial assets in the stock market.  They are deciding whether to purchase a home as a principal residence or rent and leave the money in the market.  Rents are $2,000 per month and homes of quality will require a $150K investment (only a portion of their portfolio) with a monthly cost of $1,500.

How do we look at this?

The purchase of the home needs $150K and loan is available fixed for 10 years at 3.125% with payments (all in) under $1,500 per month.  Our client would be buying the home at the bottom of the market and having deductible interest verses that $150K in the stock market and paying $24,000 a year in nondeductible rent.

Assuming both the home (est. purchase price $450K) and the market performed equally at 10% appreciation for 3 years. The gain on the stock investment will be $49,650 and will be taxable.  The gain on the home will be $186,950 including tax benefit and reduced monthly cost. The house is ahead by $137,000 or 300% and its sale will be capital gains exempt.

Obviously I am bullish on the home.  Appreciation and leverage of your principal residence is fundamentally better.  Add that it combines with low interest rates and detectability of interest and property taxes.  This makes it affordable and smart.  Putting my investor hat on, I should point out that the gain on sale of the home will be capital gains exempt. Should you be all in the market and not even own your primary residence right now?  I don't think so.

Even as an investment property, with returns in the 7% to 10% range on cash invested I like the real estate option better.  Why? Leverage!  $150K at 10% verses the appreciation on the $450K asset.

It goes without saying that you will need a good Realtor to insure a great deal on purchase.  The opportunity to own a home now has never been better.

Multifamily question of the day! Should I sell now or wait a year or 2?

This is a great question.  Multifamily has fared much better than other property types through the last 3-4 year recession.  There many reasons why: steady income, low vacancy rates, and little new construction. Multifamily actually got a lift from an influx of home owners now forced to rent.  Rents are projected to increase in coming years.

Many multifamily owners carry a misconception that their property was worth a lot more in 2003-6 (like residential) and that financing is hard to for buyers to get.  In fact, multifamily financing is available and easy under 4 units and at all-time low rates.  There are lots of good options over 4 units as well, (with some slightly tougher requirements) effectively requiring more down payment than in early 2000's. Check out Al Wilson's web site at www.apartmentfinancing.com

I disagree - income is income.  Lower rates make Multifamily more attractive and affordable.   

So hold or sell in a few years?  Unless you are thinking 5 to 7 years I recommend you consider selling now. Why?

-As rates increase buyers lose buying power (10% for every 1% increase)

-CAP rates are relatively unchanged, but cost of borrowing is low so actual rate of return is excellent.

-Hobby buyers (low end) and Investors (pros) have been sitting on the sidelines with little new construction, so there is pent up demand for good income properties

-Once construction picks up alternatives and inventory will increase.

-Vacancy rates may start to rise. (3-5 years)

In summary, unless you are committed to a long term hold, now may be the perfect time to sell your multifamily property!

Doug

Questions or comments always welcome! Doug@DHFoster.com 360-920-1114

Stock Market verses Real Estate - Right Now!

A client has 100% of their substantial assets in the stock market.  They are deciding whether to purchase a home as a principal residence or rent and leave the money in the market.  Rents are $2,000 per month and homes of quality will require a $150K investment (only a portion of their portfolio) with a monthly cost of $1,500.

How do we look at this?

The purchase of the home needs $150K and loan is available fixed for 10 years at 3.125% with payments (all in) under $1,500 per month.  Our client would be buying the home at the bottom of the market and having deductible interest verses that $150K in the stock market and paying $24,000 a year in nondeductible rent.

Assuming both the home (est. purchase price $450K) and the market performed equally at 10% appreciation for 3 years. The gain on the stock investment will be $49,650 and will be taxable.  The gain on the home will be $186,950 including tax benefit and reduced monthly cost. The house is ahead by $137,000 or 300% and its sale will be capital gains exempt.

Obviously I am bullish on the home.  Appreciation and leverage of your principal residence is fundamentally better.  Add that it combines with low interest rates and deductibility of interest and property taxes.  This makes it affordable and smart.  Putting my investor hat on, I should point out that the gain on sale of the home will be capital gains exempt. Should you be all in the market and not even own your primary residence right now?  I don't think so.

Even as an investment property, with returns in the 7% to 10% range on cash invested I like the real estate option better.  Why? Leverage!  $150K at 10% verses the appreciation on the $450K asset.

It goes without saying that you will need a good Realtor to insure a great deal on purchase.  The opportunity to own a home now has never been better.

As a broker, I tour all sorts of investment properties with my clients.  I too get tired of viewing high levels deferred maintenance, incorrect expense calculations and over priced properties. If you can't find the perfect small investment property or are tired of looking at investments with deferred maintenance, it may be time to consider the opportunity to buy and build!  We are working with a local builders and recently taking advantage of the low lot prices and very low construction costs. 

An example: Our client is purchasing a duplex lot ready to go. Our contractor partner will build a brand new duplex on the lot.  Features include: side-by-side 3 bed 2.5 bath units, each with a 1 car garage, nice finishing's, landscaping and fencing.  Each unit will be 1350 SF and rents are expected at approximately $1250 per side.  The effective CAP rate will be 7.2%.  The best part...costs all in will be under $297,000

The high inventory of vacant land has led to some great deals for ready to go lots in Whatcom County.  Our contractor partners are very aggressive and provide great pricing. 

So if you can't find it then build it!

A client asked us about what is important to students for housing?  With WWU dominating the local landscape in Bellingham, it's a good question.  We have sold 100's of units in this market and have had the opportunity to meet with many owners and tenants.

We love student rentals for so many reasons! Firstly, students are great!  Also, parental guarantee and a housing shortfall mean very low vacancies and no payment issues.  Lastly, reasonably frequent turns provide the opportunity to keep the units up to date and free of deferred maintenance.

Based on our experience here is the Top 10.

Top 10 needs for students! (housing) 

• Location to WWU (walking and biking verses driving or park and ride)
• Ability to share unit costs with a roommate
• Laundry in unit (this may be number 1)
• Dishwasher and microwave
• Internet access (free if possible)
• Peaceful location  (traffic and noise)
• Private decks
• Secure, covered, bike parking
• Easy access to shopping and services
• Storage lockers

If we were building a new property for this market, the items above would be in our top 10 considerations too.  When we help our clients purchase student mutifamily units, we have this list in hand!

This blog is local condo discussion in Bellingham WA. Our clients and Facebook buddies have asked: Why the Drake Condominiums have done so well? How is that they are selling at 70% premium to average per foot condo prices in Bellingham?  Also, Why the sudden interest and activity in the last available units and new resale's? Readers from other parts of the country likely know a few exceptional projects like the Drake in their neighborhood.

The answer is in 3 parts: 

The obvious is that The Drake is an incredibly well built and nicely appointed building. Little expense was spared in its construction. In addition, it benefits from Barkley Village neighborhood. Barkley is fast becoming a premier neighborhood in Bellingham.  The well thought out urban village concept is really taking off with locals. 

Not so obvious, is the developer strength and planning behind the building. This allowed the units to be sold in an orderly manner even in the worst market in the last 30 years.  Patience and a strong value proposition created an orderly if a little slower than expected sales process.  The developer re-priced the building at completion to reflect market realities and then passed this new lower pricing on to all reservations.  When was the last time you heard of somebody doing that?  Those were fun calls to make.  32 units were sold between October 2008 and December 2010 along with 2 re-sales. The Drake was also very early adopter of FHA financing qualifying in June of 2009. 

The result is that there has not been a single short sale in the building.  There are no foreclosures and units have held their value exceptionally well.  I could argue that there are no units under their purchase value in The Drake.  Not that buying and selling in the short term is a profitable exercise.  It's not. (primarily due to fees involved in the sale side.)

Why now?  The last week has seen incredible activity at The Drake.  The Drake is one of very few condos that qualify for both conventional and FHA financing, owner occupancy is around 85%.  The budget is exceptional with almost $100,000 already in reserves.   I think buyers have seen the writing on the wall regarding interest rates and many made the New Year resolution to get off the fence in 2011.  Rates have crept up almost 75 basis points over the holidays.

Buyers are looking for value and financing and see it in The Drake.  Risk aversion is a factor too.  The fact that building is virtually sold out offers confidence to buyers that there is no future pressure on prices. Such as the recent fire-sale at Center Pointe Condominiums, when the developer failed.

The Drake is one of a few great newer buildings in Bellingham.  We also like how Laurel Park (High Street) and The Edgewater (Fairhaven) have handled the economy. These buildings should serve as models for developers when the market improves and construction begins anew.

Best wishes for a happy and successful 2011

Doug and Lorena Foster

Foster Group Realtors

Have a question or comment?  Call or text 360-920-1114 or  email to doug@dhfoster.com

Howl back at the WOLF when you can.  What we learned from the "Wolf" blog (http://activerain.com/blogsview/1829147/when-the-wolf-is-running-the-hen-house) is that there are some pretty savvy realtors out there to help us!  I think it really hit a nerve. A great debate followed.  Thanks to all you professionals who contributed.  I thought a follow up and summary of your ideas was in order.  Our blog was a release of frustration...sparking an intelligent debate.  A strategy emerged for dealing with this problem/opportunity and some potential for improvement. Dare I say...profit!

Following, I am going to summarize many of the great points made and attempt to present a strategy for dealing with this problem. We all agreed...

Short sales are a way for everybody to win provided they play fair and act responsibly. Buyers can get a great deal, sellers may get a break and investors (banks) get a fair value for a non-performing asset. There is money to be made or to be saved by all involved.

We also agreed: 

The system needs to change and a number of innovative banks are working on fast track processes. That better include of B of A ... who are the worst. We all agreed that "local and regional banks" were much better at handling the process and helping everyone succeed.   Thanks to Wells Fargo Bank for taking on the challenge for the nationals with their "Fast Track" initiative. 2 to 3 weeks is the maximum it should take for a contractual response from the bank. Hell they can turn down a loan in 5 minutes.

Better prepared SELLERS will get better results.  How do sellers get better prepared?  By using agents who are experts or dealing with agents who recognize they are not experts and refer their client to a specialist - short sale - team.  If you want to see what a specialist team does, then visit Fred Weaver and Kevin Kauffman's team at www.group4610.com . These guys are animals. I love them.  Do you think you are up to that on your own?   Also:

 - Know the bank(s) and have their seller requirements ready in writing before you list.  This is available on-line from every bank.

 - List only once the seller has provided all the information required by their bank

 - Determine if you are really the right person to handle negotiations or should you hire a firm to support and require buyers to deal through them.  If you want to see an example of such a firm visit www.escrowlegalservices.com. Some teams have their own negotiator. Banks will pay the negotiators fee so no loss to you or your clients.

 - Get the property into short sale ahead of the offer if possible.

 - Use systematic pricing to prove the market value.  Do not just list low as you will lose and so will your seller.

 - Beware of the "Opportunity Seller" - They will not be approved. "Life is lousy in my neighborhood so I think I may dump this puppy...." Doesn't cut it.

We can't say no to BUYERS or start sifting properties to show them or we may be steering. Top 5:

 - Meet with buyers to discuss the time and effort needed to close a short sale. Explain the difference in well organized and poorly organized (read impossible) listings.  Bring a success chart (what it will take and how long depending on the seller factors above).

 - Gain agreement on their objectives and their tolerance.  Can they wait 12 weeks? Will they inspect up-front to eliminate other issues.

 - Discuss financing issues. Does the property need rehab even to be financed? 

 - Educate buyers  on what to expect from the bank, which will be a counter offer. (see below)

 - Review every property against your "success" chart before writing an offer 

We need a Success Chart. As agents we need to learn to identify properties that have a chance of success.  Seller is organized, listing agent is knowledgeable, a negotiator is available to carry the ball and the property is well priced.  (There is nothing worse than being the 1^st to identify the problem.) 

We got a lot of great information out of the responses. Here are a few that may help you make money.

The Bank counters EVERY offer.  This can lead to bad habits and dumb offers.  Resist the urge. The bank will add an addendum to every offer. Naturally, that makes it a counter even when $ are agreed.  Sly buyers will make offers that are protected under the short sale addendum effectively locking up properties until the bank responds. If you want to make 30 offers for a buyer that is up to you.

Know thyself. There is nothing wrong with not having all the resources to do this for clients. Sit down with the specialists and develop a strategy and referral plan.  For as little as 30% of the fee you can have your "own" specialist team and a lot more time. BTW, Lorena and I don't offer this service to other agents, so this is not a pitch. We use a few specialists to help us get it done.

Our time is our most valuable asset.  As agents, we are paid on results for sellers and buyers. Like golf, we only write down the score not the effort.  Having a system will improve our odds and reduce our time.  As a buyer, losing market opportunity chasing bad deals (often for months) will hurt the result.

There is money to be made (and to be saved).  We can't ignore 30% of our market or our clients.  It is time for mastery or to get help.  Don't blunder off without knowing the obstacles. Find some experts or become one quickly. 

Lastly, please howl at the Wolf, when you can... for a better way to treat people.  Even better, hire professional howlers like Kevin and Fred.

For a free list of all available investment properties in Bellingham visit my real estate site:

http://lorena.kwbellingham.net/results.aspx?city=3931&featureor=BO%2CSS&sort=listprice_asc

Best wishes for success! Doug and Lorena Foster

on short sales..INSANITY RULES

Author's Added Note:  Wow - this hit a nerve!  I know its supposed be a fox, but foxes are cute so I chose a wolf.  Also the following discussion does not mean we shouldn't help our short sale sellers. Listing short sales is a specialty skill - If you aren't sure how to do it properly, you should consider referring the listing to a specialist. It is all about getting the seller ready for the process. To all you listing short sale specialists....we love you. If we have to show a short sale, the listing agent's knowledge and skill with them is number one in our mind.

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Why any agent would bring a perfectly sane buyer (investor or otherwise) into the short sale process is beyond me!  (Yes I am guilty)  We all know that locked up capital is bad. If we added all the buyers waiting six months for an "inane and uniformed" answer from a national lender on properties the lender (theoretically, desperately) needs to sell, the backlog number would be staggering.  We have the economy of a small nation trapped in a process created by the very guys who caused this mess.

If we took all the buying power wasted on this failed process and put it to work in the market we wouldn't have a housing crisis. The numbers would reflect the real will of consumers. 

OK, we are guilty as charged. Like any broker, we follow the rules. We represent our clients, and if they must sell short, we work the system. If a buyer insists on buying a short sale property, we present the offer.  Then we watch the current process kill the buyer's motivation and harass the seller for more of the "same" information. Ultimately 9 out of 10 fail. Is this our new job? We don't think so!

SHORT SALES ARE A THING OF THE PAST

They are over and done with until banks develop a process to evaluate and promptly review perfectly good offers in a more efficient way. My new rule for buyers is simple -we will not make an offer on a short sale without information from the seller's agent that we can have a 10 day response.  Let's call that an approved short sale.  Even a complete refusal will be fine. Just tell us now!

VOTE WITH YOUR DOLLARS

 If we just say NO to this process --- it will go away.  Not a moment too soon. We have no way to evaluate the economic cost of all the lost hours and trapped capital pursuing some worthless effort of buying a property that is in this hell-hole of a system. But we see the results every day.   Why not advise our sellers to let them (naturally after talking to a lawyer) foreclose? Let the property turn to weeds and come back 6 to 9 months later to make an offer 35% lower - even if we need gas masks to enter the house, because the lender has turned off the water, gas and all other services.

BUT WE WANT TO HELP OUR SELLERS

I know we do, but what help is it if the bank reserves the right to sue them.  Sellers are doing short sales in the misguided opinion that it will reduce the credit score impact and amazingly, because they want to do the right thing.  As their broker, you need to tell them it is not necessarily so, and help them get legal advice. They may faithfully execute the effort to sell the house, show it well, and maintain it despite their personal loss. They will still be subject to the legal remedies of the bank.  Enough.  Sometimes you need to walk away.

BUT OUR BUYERS WANT A DEAL 

In order to get a deal you need a party on the other end to agree. Short sale sellers will agree but don't have the authority to sell.  Buyers need approved sellers who have done their homework and are ready to deal. This is much better when the bank has already done whatever they are going to do.   Dare we say post-foreclosure? BANK OWNED - aka REO. At least at that point a result has been determined.

Our experience is that our clients have a 3 month tolerance for BS. Whatever they liked about the property, in 3 months they will be gone. Not only will they be done with the process but they will rethink whether they even want to buy a property, or play at all... in this bank run game.

 JUST SAY NO!

 When buyer and seller meet on terms things usually work out. They sort out inspection and other items and meet in the market. Apparently now, the bank is dictating the rules.  We, as brokers, can decide if we want to participate with our clients or move them to something better.  The days of selling a house and enjoying the happy result for all parties seem dim, but we won't give up.

We represent our buyers and sellers. When we know a process is flawed or even unfair we can just say NO! Eventually our message will reach the banks and legislators and they will end this unfair, disrespectful and inefficient process called "unapproved short sales".

Doug and Lorena

I am weighing in on Property Management in this blog. This is a huge issue for our clients. The effect of poor PM on real property value is staggering.  In this market we need every advantage to get fair market value for our Multifamily and Condo clients. 

Editors: note: In my examples, I am not talking about a simple rental of a home or condo.  I am specifically talking about properties above 4 units where purchases are based on NOI and CAP rates.  I still think good PM is important for all rentals.

If you ask most property and condominium managers the real property market value of a building or home they manage, they will tell you they don't have a clue.  Furthermore, if you press them, they will tell you that it's not their job, nor can they affect it anyway.  While the brochure may pay heed to "protecting your asset" nowhere in the contract will it address maximizing its value.

The problem lies in the job description and in the contract terms usually dictated by the management firm themselves.  They are compensated by fees which have nothing to do with real property value or even results.  So what's the problem?

For starters....fees.  These are from a local contract: The marketing fee - one time - up front.  The meeting fee to show up at a meeting of tenants or owners, the maintenance or after-hour call fee, the emergency fee, the application fee, admin fees for letters and communications, the move in and move out fee, the pet fee and best of all the maintenance "mark-up" fee.  Oh yeah, I forgot condo's --- the "per door fee"

Compensation based on a % of rental:  Now I know a few of you think you have me here because of the % fee on rentals.  I mean, who isn't going to maximize rental rates and keep vacancy down, when they get paid more?  Unfortunately we see this all the time.  If a unit rents (in a day) at $900 per month with nothing but a Craigslist ad, but requires effort, marketing and diligence to rent at $1,100 per month guess what? The easiest path to a check rather than the best result will win everyday. What does that $200 per month cost our client or the owner?  ($200 * 12) /cap rate (lets use 6%) = $40,000 per unit.  You have an 18 unit building? Ouch! Make that $720,000!

Condominium Management Agreements are the worst.  The only way these guys get paid is per door (empty, rented or owned) plus fees and markups on services they provide or that they contract.  That water heater repair just went up.  We recently had a 22 year old CM Rep attend a special meeting of an HOA - the contract said that these meetings are $125 per hour for her presence.  No offense but she was making about $20 per hour.

 Property and Condo Management is both a service business and a fiscal responsibility.  Firms are responsible for more than tenant/owner satisfaction. They should be held to rigorous standards for maintaining market rents and keeping expenses down, eliminating deferred maintenance, reducing impact and ultimately building more real property value.

It's time for a PM firm to propose reduced fees and higher incentives for measureable results such as increased NOI (net operating income).  This is a completely manageable and easy to review number.  And I am not talking about deferring maintenance or needed expense.  Those numbers can be based on previous % of income.  I am talking increased top line, reduced fees and reasonable investment in upkeep.

The estrangement between property management and real property value needs to end.  Contracts should be re-worked to incent PM firms to achieve the highest real value for the asset at all times.  I also think the days of standalone PM firms are numbered. Ultimately, Real Estate businesses need to take charge of this aspect of their client's success. No more buck passing!