Focus On Investment Opportunities

This week I want to change things up just a little bit and talk about the investment opportunities in our current market. I try not to get too "salesman-like" on this blog - I really want this to be more of an informational resource than anything. But look, there's a reason why 18.1% of the transactions in this market were cash deals last year. The word is out, and this market is starting to be seen as a prime investment opportunity by investors both in and out of this area. As you may recall if you've been reading this blog, Diane and I are big enough believers in the value in this market that we jumped on an investment last year ourselves.

Before I start throwing some numbers and scenarios at you, let me make a distinction that I personally make when I'm talking about these types of things. When I think about real estate as an investment, I tend to think of it as a long term "buy and hold" proposition. I personally think that this is the best way to approach it over the long haul. In a rapidly appreciating market like we had a few years ago, we see a lot of people looking for short term gains. I don't begrudge them that, but it's a risky move, and more than a few people doing that lost a lot of money when the market turned on them. There's an old Wall Street maxim that I've heard that rings true here: "Bulls make money, bears make money. Pigs get slaughtered." Now don't take that the wrong way - I'm not calling anyone a pig here. I'm just pointing out that thinking short term with this level of investment is risky, and it can bite you in the end.


Oh, and another disclaimer here - I'm not a tax expert. I know generally that there are some tax benefits from owning real estate as an investment, but I leave the details to the pros. So I'm not going to factor in the tax ramifications of a real estate investment into this post. If you have questions about taxes, go see your tax accountant. If you don't have one and you want to go this route, get one. We personally use Walker, Wilson and Hughen, and highly recommend them to our clients.


OK, let's look at a few scenarios:


Cash Is King


Let's say that you have some cash that you want to put into a real estate investment, but for one reason or another, you don't want to leverage it with a loan. In our case, this is the route we went out of necessity. Getting a mortgage as a Realtor these days is kind of dicey, and most reasonable lenders would pass out from laughter if we went to them with our past few years of tax returns and asked for a loan. So let's do this at a couple of different price points and see what it looks like.


Your typical 1960 tract home priced at $150,000 in town is a good place to start. Most of these are pretty rough, so you probably need to plug some money into them. Let's say that you're like me and you have limited time and handyman skills. You need a contractor to do some work, and it needs paint & carpet, maybe it needs some termite repairs, etc. So let's put another $25,000 on top of that for the sake of this discussion. And you'll have a minor amount of closing costs, probably around $1500. So you're in with a total acquisition price of $176,500.


Probably a ballpark average on rent for this house is somewhere in the $1250 range. So let's figure on that, and say that you don't want to manage the property yourself, so you hire a property management company. You'll probably write off about 5% of the income, plus a percentage of the first month's rent. You'll need to pay property taxes on it as well, about $1875 a year for the first year with no more than a 2% increase annually. Hazard insurance is probably something on the order of $500 a year. Figure on about a 10% vacancy to be on the safe side, but hopefully you'll have better luck than that. And you'll have some maintenance to do on occasion. That's hard to predict, but let's say it's around $2000 a year. So using some relatively pessimistic assumptions here, we're looking at the property bringing in $8450 a year after expenses. That's about a 4.8% annual return on your investment before taxes. Not setting the world on fire, but not too bad. And while it's not as liquid as most investments, it's going to see some appreciation over the long haul as well in addition to the income.


Let's look at another cash scenario. Let's say that you have $80,000 to put into this investment. Now your options are a little more limited, and you might have to be a little bit more patient. Now we're probably looking at a condo. Let's say that you find one for $70,000, and need to put some paint and carpet into it. Between that and the closing costs, you wind up with a total investment right at $80K. Now let's look at the income side of it. You're probably looking at a 2 bedroom unit, maybe a Lompoc Village or Cypress Woods. We'll assume about $850 in rent on that. Property taxes should be about $875. The same property management and vacancy rates are probably good numbers to work with. But we have to factor in HOA fees, and those have been going up of late. Let's work with $275. Adding it all up and taking out the expenses brings in about $4500 annually before taxes. That's about a 5.5% return.


Use Other People's Money


Here's where it gets good. I talked to one of our preferred local lenders, Pat Leachman at Main Stream Financial this afternoon to check in on his non-owner occupied rates. As of today, he's quoting us a 5.25% rate on a 30-year fixed mortgage with 20% down, and 5.5% with 20% down for well qualified borrowers.


Great Googly Moogly! Those rates are just unbelievable.

OK, let's run that $150K scenario through this with a loan factored in now. If you put 25% down, that's $37,500. Your closing costs go up when you take out a loan, so I ran these numbers through a program that we use to estimate these things, and it looks like about $9000 in closing costs. Add in the $25K in repairs that we figured above, and we're looking at about $71,500 to get in. The monthly payment factoring in property taxes and insurance comes to about $825. Using the same income/expenses assumptions as above, and taking out the taxes & insurance (because it's in that monthly payment), you're looking at about $2350 annual positive cash flow. We're down to a 3.3% return on that $71,500 before we talk about taxes, but hang on there - talk to your tax pro about this. The ones that I've talked to have much better things to say about leveraged real estate investments than they do cash investments from a tax standpoint. And the growth over the long term on the property value looks a lot better when you look at it in terms of the cash you laid out. Say that $150K become $200K in a couple of years. Now what's the return on your $71,500? What about 10-15 years from now?

If you go the 20% route, the numbers change a little bit. I've probably done enough math here, and if you're still reading this, thank you. In a nutshell, that investment works out to a slightly smaller positive cash flow, but a little better annual return on the initial investment. Do I even need to go into the condo scenarios with loans? Probably not, and with a lot of our low price condos being a bit problematic for loans, it's probably an academic exercise at this point.

So do you see why we have so many investors in our market today? I've tried to use some pretty conservative, bordering on pessimistic, numbers on those scenarios and it still pencils out any which way you look at it. I'm not a financial genius, but I'm telling you - if you believe in the long term value of real estate, we have the perfect storm of prices in our market and interest rates to make right now a historically prime opportunity to make this investment.

Monday Morning Numbers 1/25/10

Good morning once again. Hope you didn't wash away with the rain last week. I've said many times that I get much amusement from watching Californians deal with weather. Being an old Midwestern transplant, I gotta say we're a bunch of wimps out here. And I say "we", including myself, because even I was grumbling by Wednesday about a few days of rain. 27 years in California has made me soft. I'm OK with that... Let's take a look at this week's numbers:

Active Listings: 76
Contingent Listings: 45
Pending Listings: 52 (30.1% of the inventory)
New listings: 9
Months of inventory: 4.0
Click here for an updated price per square foot chart.

No big changes again this week. Pending listings appear to be trending up slightly, and this isn't typically a time of year that we see that. But as I've observed a few times, I think we can just about throw typical out the window in this market for a while.

Later this week I'm going to put together some numbers to show why I think we have an incredible real estate investment opportunity in Lompoc right now.

Look, Ma, I'm on the TV!

Hey, I'm a TV star! Well, maybe not...

But one of our local agents, Connie Barlow at Century 21 Armstrong here in Lompoc has a cable access show that she records every couple of weeks, and she graciously asked me to come on the current show to talk about Lompoc Real Estate stats. And as a conversation between a couple of agents will do, it meandered a bit into some other areas as well.

I haven't seen it yet, but I have to warn you - I'm not a polished TV presence, and I'm sure that I stammered my way through a lot of it. And let's be real - I have a face for radio. Let's just say that I don't think that NBC will be calling me to take over the Tonight Show... But if you'd like to take a look at it, it runs on Comcast Channel 25 on Thursday at 6:30 PM, Friday at 4:30 PM, Saturday at 6:00 PM, Sunday at 8:00 PM, and Wednesday at 7:30 PM. I think it's set to run for the next two weeks. Connie said that she'd get me a DVD of it, so if you don't have Comcast, maybe I can hook you up if you want to see it.

Focus On Condos

Let's take a fresh look at the Lompoc Valley condo market this week. When last we visited this market segment back in October, I had made mention of a couple of factors that were putting a damper on this segment. None of that has really changed much in recent months, and it would appear that we're still seeing signs that this market segment will probably lag behind the rest of the market in any price appreciation that might be coming.

As of this evening, we have 13 active listings on the market. The mix hasn't really changed much since I last reported on them - 3 REO/8 Short Sales/2 Traditional sellers. In addition, we have 6 contingent listings, all short sales.

Sales activity has been slower in recent months, with only 5 pending units (3 REO/2 SS/0 Trad), and only 11 sold units over the past three months (7 REO/1 SS/3 Trad). While the market as a whole has been bouncing around 4 months of inventory for the past several weeks, this segment (on an admittedly small number) is looking at a little over 5 months. That's still not too bad, and the well priced units still get a lot of attention.

Despite the problems with financing some of these units in our current lending landscape, they remain an attractive "buy & hold" investment for cash buyers on a limited budget. We've seen 5 sales in the past few months under $100,000. Next week, I'm going to do a piece on investment opportunities in our market, and I'll break down the numbers for you on both cash investments like this and leveraged investments. Bring your checkbook.

Monday Morning Numbers 1/18/10

Happy Rainy Monday, everybody! I'm mostly recovered from a weekend of lackluster playoff football games, and ready to brave what passes for inclement weather in this part of the world. Seriously - I get the biggest kick out of Californians complaining about getting rained on this time of year. Go spend a January in North Dakota, then get back to me. Anyway, let's take a look at our market numbers for this week:

Active Listings: 75
Contingent Listings: 44
Pending Listings: 48 (28.7% of the inventory)
New listings: 13
Months of inventory: 3.7
Click here for an updated price per square foot chart.

Only some minor movement to report this week in these numbers. Despite a relatively robust week for new listings on the market, we saw a little drop in our active listings this week. That drop corresponded roughly with an increase in pending units. As I've been saying for a few weeks, at some point in the next handful of weeks, I expect to see some drop off in new REO listings, which should result in a bit of a dip in the inventory.

Later this week I'll put out an update on condo activity in our market, and in coming weeks I have some new topics to cover that I think will be interesting. Keep checking in.

2009 Year In Review

OK, now that we have the fourth quarter out of the way, let's take a look at the entire year and see how 2009 stacked up in our market. Once again, some of these numbers are combined stats from CCRMLS and LVAOR. Let's start with those:

We had 424 sold residential units in the Lompoc Valley in 2009. This was down very slightly from 2008 by about 2.1%. We had a little bit of a slump in the second quarter of the year, but we saw a lot of activity in the fourth quarter to get us back up to about even with 2008. What wasn't even close to the same was dollar volume of sales. We had about $97.6 million in total sales for the year, which was down about 18% from 2008. The joys of a declining market.

62.3% of our sales were REO properties. That's pretty close to the same from 2008. The percentage of short sales, however, has almost doubled, now up to 13.0% for the year. If you've been reading this blog, you know that I believe that short sales are here to stay, and I expect that we'll see their share of the market grow.

I had posted the updated price per square foot chart in the fourth quarter update earlier this week. Let's add a couple of charts for the year end wrap-up. I don't typically use median prices as a benchmark to track values, but they do tell us something about what's going on in the market in terms of what price points are seeing activity. So here's a look at what our median sales prices have looked like over the past several years. These numbers only apply to houses - I took the condos out of the mix for this. The trend line looks pretty similar to the price per square foot chart, but if you look closely, it looks like it kind of lagged a bit when the market was declining. I have a theory about that - I think that when the market was declining, people who wanted to buy a house for $400,000 were still buying at that level. They were mostly just getting a nicer, bigger house for that price.

And since I track inventory levels weekly, I got around to charting that as well. You'll see here that our inventory hasn't only dropped in terms of raw numbers, but it's also dropped to a very low level in the context of sales activity. The traditional benchmark that our industry uses for separating a buyer's market from a seller's market is six months of inventory. A number above that is thought to favor buyers, and below is better for sellers. I don't think it's as simple as that (it never is), but we've clearly turned a corner on this market.

Oh, and the inventory chart is LVAOR data only. Since we've gotten to that portion of the program, let's take a look at some more LVAOR-only numbers:

Market times remain low. The median days on market (DOM) for our 2009 sold units was 27. That changes slightly when we break it down. REO's had a median DOM of 21, short sales were at 133, and traditional sellers at 24.

Escrow periods were relatively stable this year, with transactions taking a median of 43 days from contract to closing. I would expect that to stay around that level for as long as we are dominated by FHA & VA loans, but if conventional lending makes a comeback, it might drop a little.

Because so many properties have been priced aggressively, we've been seeing most of our sales at or above the list price. For the year, 52.9% of our sales were at or above the list price. I would have thought that this would have been largely skewed by the lower end of our market, but when I broke it down it turns out that 54.6% of sales below the median sold at or above list price. So there was some increase there, but not as much as you might think. The moral of the story is, a well priced property is a well priced property, regardless of the level.

So what lies ahead? My best guess is that at least for the first half of this year, we're going to continue to see strong buyer activity. We have the extended and expanded home buyer tax credit out there until the end of April (with a deadline of June for closing), so that should continue to stimulate some buyer interest. And investors are still all over this market, and will be for as long as things pencil out.

I expect that we'll continue to see distressed properties dominate the market. We might start to see the mix change as short sales get to be more common, but I'd be surprised if this time next year if the combined REO/short sale market share isn't still around 75%.

I think that the signs that we've been seeing would indicate that we've reached the bottom of the market. But this may not mean that recovery is imminent. I expect us to kind of bounce along somewhere around where we are now price-wise for the next year or so. If our interest rates remain low, we might start to see some definitive appreciation around the end of the year. If they start to creep up, it's probably going to stall any price recovery.

2009 Fourth Quarter Update

This evening I'm putting out the first of two full market update posts for this week. We'll start with a wrap-up of activity in the fourth quarter of 2009, and then later this week I'll put together a full 2009 year in review.

Back in October when I did my third quarter review, I mentioned that I've added a data source to these updates. You can go back to that post if you want the long, geeky explanation of what that means. Bottom line, some of these numbers are combined numbers from our Lompoc MLS and CCRMLS. Let's start with those:

We had 118 total sold units in the Lompoc Valley for the last quarter of the year. That was up 5.4% from the same quarter a year ago, and was the best fourth quarter in terms of unit volume since 2004. 71 of those units were REO's (60.2%), and 17 were short sales (14.4%). Those numbers appear to be pretty close to the year end numbers I'll be reporting later, and though there was a little bit of fluctuation, this activity has been pretty stable.

The average price per square foot dropped a little this quarter, as you'll see from this updated chart. I think that this number dropped a little bit despite what appears to be a stable market in terms of price in most segments and areas. But the mix of properties that sell in any given quarter can influence that number in a small market like ours, and I don't think that every segment of our market has quite bottomed out just yet. I do see data that indicates that some areas and segments might be seeing the first signs of appreciation, as you might have noted if you've been reading this blog for a while.

Now let's get to the numbers that come exclusively from the LVAOR MLS:

Looking at how buyers are financing their purchases, 19.8% of our sales were all cash transactions, 12.9% were conventional financing, 49.5% were FHA, 16.8% were VA, and 1.0% fell into the "Other" category. The cash percentage is very close to where it's been for the past couple of quarters, but the mix of loans definitely shifted dramatically this quarter. 12.9%? How much longer do we call that kind of loan "conventional"?

Market times continue to be short, with a median of 26 days on the market (DOM) for all sold units. This quarter I decided to break them down a little to see the differences in distressed properties, and not surprisingly, we see that the median DOM for REO's is a little lower at 21 days. Also no surprise, the median DOM for short sales was considerably higher, at 102 days. Traditional sales had a median DOM identical to REO's at 21. That one surprised me a little bit.

Escrow times remain stable, with a median of 42 days. Breaking that out into the REO/SS/Trad format doesn't seem to get us much more info - all three are pretty close to that number. To be honest, I think that our industry probably doesn't report this type of data properly for short sales, but that's a long technical discussion that you probably don't really care about, so I'll skip it here.

From what I see, it looks like we're still bouncing along at the bottom of the market. I've said here before that I think that we're here for a while, and I'll stick to that story. It's still a great opportunity market for buyers, and I'll be delving more into that in coming weeks.

Come back in a couple of days - probably Friday - and I'll put up some total numbers for the year and do a little bit of guessing at what 2010 holds in store for us.

Monday Morning Numbers 1/11/10

Another week begins, and we start it off as always with another set of market stats:

Active Listings: 82
Contingent Listings: 44
Pending Listings: 42 (25.0% of the inventory)
New listings: 9
Months of inventory: 4.0
Click here for an updated price per square foot chart.

Very little change in these numbers over last week. We did see a few more new listings hit the market this week than we did during the two holiday weeks. It would have been pretty surprising if we hadn't, actually. As I said last week, I'm expecting a slight down trend in our active inventory in coming weeks due to some slowdown in recent foreclosures, but I also expect that to be a short-term trend.

Later this week I'm hoping to have two separate posts. First, I'm going to do a fourth quarter review, and then I'll recap 2009 as a whole with a little prognostication for what I see in 2010. Should be interesting.

Focus On Short Sales

We're back around to taking a look at short sale activity in our market today. It's been a few months since I've reported on this segment of our market, and I really shouldn't let it go that long. Bad Dennis! Bad!

If you've been looking at the various area reports that I've been doing, you'll see that every area has a little variation, but short sales are accounting for a lot of the activity in most areas of our market. Because we had so many homes sold at or around the peak of the market, and many more were refinanced in that time frame, we have a lot of folks out there with homes that have more debt than market value. Not all of them need to sell, and that's good.

But some of them do need to sell. That's what we're talking about today. As of this morning, short sales account for 46.1% of our combined active and contingent listings. This has been right around that level for a couple of years, so that's not surprising. The mix is reasonably close to where it was when I last reported on these numbers in September - 29.3% of our active listings and 80% of our contingent listings are short sales.

Looking at sales activity, 24.3% of our pending sales are short sales. That number had dropped off to 15% a few months ago but now it's back where it was in May. Short sales accounted for 14.7% of our sold units in the last three months. This is back up from a dip in September, and in line with the 14% that we've seen over the past year.

The success rate of short sale listings continues to be pretty stable. 32.2% of the resolved short sale listings (not counting listings that are currently active or pending) that came on the market over the past 15 months were sold. That compares to 71.4% for the market as a whole. They're still harder to get done, and quite frankly, some of them never have a chance for one reason or another. But we're making progress.

Looking ahead, there appears to be some progress on lenders getting some guidelines together that will help make this process a little more viable. The government came out with some guidelines that may or may not be adopted by lenders, but the trend right now seems to be positive, and I would expect that we'll see better success for these types of transactions over the next year or so, and they'll start to comprise a larger part of our market. Which is good, because until we start to see more homeowners with equity, we're going to have short sales. And that might be a while - maybe several years.

Monday Morning Numbers 1/4/10

Happy New Year! I hope everybody had a reasonably sane celebration, or if you didn't, that you're at least out of the hospital or out on bail by now. Let's take a look at our first numbers for a brand new year:

Active Listings: 80
Contingent Listings: 46
Pending Listings: 41 (24.6% of the inventory)
New listings: 4
Months of inventory: 4.1
Click here for an updated price per square foot chart.

New year, not so new numbers. Those look a lot like they did last week, with slightly lower inventory and pendings. Those last couple of weeks of the year are traditionally slow activity weeks for the market, so that's no surprise. We didn't see quite as many expired listings as we had typically seen in years past at the end of the year, but it's probably mostly due to the fact that we didn't have a lot of listings to start with.

It looks like December was a slow month for foreclosure activity. Also, several banks put a moratorium on foreclosure evictions over the holidays. That data probably points to a slower than usual rate of REO listings hitting the market in the next several weeks, so I wouldn't be surprised if our inventory level drops back down a little later this month and in early February.

Come back later this week and I'll have come up with something to write about. It might even be good.