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Monthly Archives: October 2016

Official Office Update

office

Our office looks much warmer in its new color. Desks will go on the other side of the room. Excuse the random doggie photo bomb! It’s not even our dog!

Recently I mentioned that we closed on some property that will be an office for us and our colleagues in Cameron, Texas, where Lee spends most of his time and I spend half of mine. Why did we do this, when we are an Austin business? To be honest, it’s because we need to get reliable Internet and phone service, since so much of our work is virtual. We still have our official Austin mailing address, and hold all our company meetings in Austin, though.

We’ve installed a few furniture items and had the downstairs painted in colors that match our corporate red and tan. While working on the room, our crew discovered that the hideous carpet in the former master bedroom (soon to be Lee’s office) had really nice hardwood floors, just like they always find on television shows! They just need a bit of sanding and finishing. We will probably be removing the fancy draperies and putting in some simple blinds, too.

office

The former master bedroom has one red accent wall, and some lovely floors that were under sad, old carpet.

There is still a lot to do, but at least the colors look good, and the wide white trim becomes a feature.

At our favorite consignment shop, we got a very large wooden table with red legs to be our conference room table. Yesterday we went and got it, drove it up to Cameron, and realized that the one and only key to the house had slipped out of his pocket at some point on the journey. Argh. Time to call in the locksmiths! In any case, photos of THAT will have to come later.

Luckily, there’s always something fun to do around old houses in small towns. While we were figuring out what to do, we picked a good amount of nice pecans from our new pecan tree! There are actually two of them, but if you check the picture you’ll see some very tiny nuts. One tree apparently makes only mini-pecans, which sound more trouble than they are worth!

In any case, we look forward to using these offices and to collaborating with our fellow real estate investors from there. We’re not worried about fires or flat tires, since we have a tire store and a fire station across the street. And car breakdowns? No problem. That’s just one building down from one of the rent houses that will conveniently pay our mortgage for us.

Some people thought we were nuts to buy this property. Maybe we were.

Some people thought we were nuts to buy this property. Maybe we were.

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We’ll See

The population of the US by age

The population of the US by age

Applying national statistics to local markets is always problematic. While local markets are informed by national and world markets, they are driven by local conditions. You can always find local exceptions to national trends. For example, Texas weathered the 2008 downturn much better than other parts of the US (and some parts even boomed) because of the Eagle Ford Shale oil boom. Similarly, parts of Texas were desperate during the national boom of the 90s because the farm economy was down.

That said, I’m going to show you three graphs of US census data that, according to economic blogger Barry Ritholtz, “tell the tale of the US housing market.”

The top chart shows the current population of the US by age. Surprisingly, 26-year-old are the largest single age group while Baby Boomers like me are starting to die off (but we are apparently still a large enough block to cause problems for a well-raided Social Security fund). Now, most people who buy a house buy their first one sometime between 25 and 30. So this age group should be putting a lot of pressure on the housing market.

Home Ownership

Nationwide fewer people own their own homes as a percentage of the overall population.

But home ownership is still trending down (see the middle chart). Why is that?

Part of the reason is that the largest population segments—the one that would normally be powering the housing economy—are staying at home. Almost ⅓ of still lived with their parents as of 2013 (bottom chart).

I don’t want to get into a discussion of why they still live at home. Frankly, I don’t know. But it is important to understand that they do for a couple of reasons.

  • Banks take this information into account in making lending decisions. Just look at the source of the graphics: Deutsche Bank‘s Chief International Economist Torsten Slok.
  • It speaks to the way the national economy is evolving.

Conclusions

Almost ⅓ of people under the age of 35 still live with their parents.

Almost ⅓ of people under the age of 35 still live with their parents. This number is considerably higher than it has been for most of my life.

At the risk of falling victim to confirmation bias, this data supports one of my beliefs about the way our housing economy is evolving: Home ownership is concentrating in the hands of fewer people, namely investors or landlords. This concentration has several consequences for investors and homeowners alike.

  • This trend will continue and we will see more renters and people living in extended family units. Rents will go up, and more families will be concentrated into denser housing like apartments.
  • As the percentage of renters increases, wealth will become more concentrate in the hands of fewer people.
  • This concentration of real estate wealth will be self-reinforcing.
    • It will become more difficult for young people to save enough to buy their first home.
    • Investors wanting to sell single-family homes will face a shrinking market comprised primarily of other investors whose main interest will be to buy as cheaply as possible in an expensive market.

Given a long enough view, the market will eventually “normalize,” but what does that mean? Was the late 20th century the golden age of individual home ownership? I certainly hope not. I want to continue to redevelop homes families can be proud to call their own, not continuously expand my rental portfolio. As my dad used to say, “We’ll see.”

 

 

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Inflated ARV: Market Timing

Bar graph showing an upward trend in home prices.

It’s much easier to predict market cycles in real estate than in the stock market (where many would say it’s impossible), but you can still lose your shirt by assuming the market will always go up.
Source: Austin Board of Realtors®

One of the easiest mistakes to make in renovating houses is to overestimate their After Repair Value (ARV). In this post, I’m not going to delve into motivations for inflating a house’s ARV. After all, I’ve done it to myself, so far be it for me to cast asparagus on anyone. I’m just going to talk about how it happens, and there are only a few ways:

  • Use the wrong comps.
  • Make the numbers fit the model.
  • Mis-time the market.

I originally planned to talk about all three of these risks in one post, but I soon figured out it would be way too long. Click here to open all posts on this topic.

Mistime the Market

In the stock market, they say the fastest way to go broke is to try to “time the market”—that is to buy when the market is lowest and sell when it is highest. Real estate markets move much more slowly, and we have leading and trailing economic indicators to help us time the market. Some things to consider are:

  • Special uses
  • Seasonal differences
  • Renovation time
  • Market cycle
Special Uses

Special use properties make it easy to misjudge their value.

Farm land is cheaper in bulk; buying by the acre gets expensive. But farm or ranch land doesn’t produce any income unless you actively work it, and—while it does appreciate over time—you can be looking at decades to see significant improvement.

Offices, industrial space, and recreational properties exaggerate swings in the local business cycles. You must have a really good finger on the local economy’s pulse to play in this park—or need the office space yourself. It also costs more to get into this game than standard housing. That said, there is plenty of money to be made if you find a property where the use is about to change—like along the perimeter of where a new Box Store is going in.

Seasonal Differences

Housing in general sells better in the spring and summer, but resort housing exhibits this behavior on steroids. Many fewer buyers even think about buying a lake house when it’s too cold to get in the water or a house on a golf course when the greens turn white with snow.

We also know that water frontage adds considerable value. But what happens when a drought sucks the lake’s shoreline a quarter mile out? During the last drought, the receding shoreline exposed everything from illegal sewer lines to missing persons still sitting in their rusting cars.

Renovation Time

This is a big one—and one that has bitten every investor I know. You expect a project to take 90 days, but it actually takes six months. Maybe you find unexpected conditions. Maybe it takes longer than anticipated to get permits. Maybe you contractor flakes out.

At a minimum, that means you have additional holding costs for each of those three months, and that can really add up on a big project. At worst, it means you may miss the selling season or even hold a property into a down cycle.

Market Cycle

Given time, real estate will probably appreciate. But never assume appreciation in your purchase decision. If you do, you may wind up holding the property for decades or centuries to recoup your investment. Just look at the Rust Belt or Detroit.

The rule of thumb in Austin is that we have a five year cycle. The market goes up for three years and slumps for two. But the market is unpredictable. As my friend Shenoah Grove likes to point out, “We are now six years into our five-year cycle.” While this prolonged up-cycle is being driven by bigger economic trends—growing population, strong economy, oil boom (yes, the price per barrel is down because we have so much production right now.)—the likelihood of an adjustment makes longer renovation project much more risky.

Given the human trend to assume an up market will last forever, I’d be extra careful about every buying decision.

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I Must Be Getting Good at This

Sue Ann and a tree

Sue Ann amazed that trees change color in the autumn.

Hello, this is Sue Ann. I’m on vacation in Denver enjoying the cool weather and changing tree colors, but I’m taking a break to talk about what I’m seeing here, from a real estate redevelopment point of view. It’s funny, but now that I do this all the time, I can’t help but evaluate every place I go as potential for what we do. Here are my totally subjective findings. Bear in mind, I didn’t study up on this place before I got here. This is all just me thinking.

Neighborhood

Where we are staying is in north Denver, Colorado, USA. It is a place anyone who doesn’t mind living fairly close to your neighbors would love to live. There are incredibly charming houses, ranging from some really old Victorians a few miles away, to meticulously renovated bungalows from early in the 20th century where I am staying. There are parks everywhere, funky eateries, interesting places to shop (and of course marijuana dispensaries)…and very easy access to the freeway to get to work or the surrounding area. It’s near the stadium and other attractions.

The area reminds me a lot of central Austin. There are many lovely small, old homes, interspersed with much, much bigger very modern-looking houses plopped into each block. I’d say it’s about 75% old and 25% new and trendy. Everything has wonderful landscaping—this is not a poor neighborhood, judging from the upkeep. My guess is all the less-attractive homes were razed and replaced with the big ones. The first picture in the gallery below shows what’s right across the street from me.

Now, is this an area in which I’d love to fix up a house and resell it? You bet! Do I think I could? Maybe not. For one thing, you do NOT see many homes for sale here. Looks like this is a very popular location. A seller’s market. But I’d keep looking in all the usual places (foreclosures, estates, etc.).

The House and Its Strategy

Where we are staying is the last house in the gallery (photo 8 because I had trouble re-ordering them). It’s not the most attractive house, and in fact is a duplex among mostly single-family homes. It’s exactly what I would have bought in this neighborhood f I had a chance, so bravo to this homeowner.

The house has been renovated, for sure. I had to laugh at myself when I walked in and announced, “Oh look, a rental level renovation!” My traveling companion wondered how I knew. I ticked off these tell-tale signs:

  1. The floor plan is obviously original. There are a lot of walls a more upscale renovation would have knocked down.
  2. The flooring is the standard vinyl plank stuff we all put in rentals. Looks good. Is sturdy.
  3. The kitchen floor is those gray rectangular tiles we all use.
  4. The kitchen back-splash and kitchen counters are entry level tile and granite. They look nice, are easy to clean, and don’t break the reno budget.
  5. The kitchen cabinets are builder grade or lower, and not custom. In fact, they don’t quite fit, as a couple of the photos below explain.
  6. Everything in the entire house is one color.
  7. All-new doorknobs. All the least expensive at Home Depot.
  8. New windows (actually they are pretty good).

I’m guessing the guy put in $15-$20K on this, maybe less. And bingo, all it took were some furnishings from Target (see Photo 7, in which I can tell you where every low-cost yet sturdy item came from), and there is an Air BnB that will produce income all year round. My guess is it’s already paid for itself, and if property values continue to rise, the owner can make some good money selling it to someone who wants to do something fancier later. It’s one of the many strategies a renovator will use, and a good one. This owner has obviously been well trained, perhaps by the same folks who trained us!

Kudos and Criticisms

I get a kick out of evaluating the renovations other people do. I am sure folks do the same to us (why DID they fix up that lake house so much, people may ask?). So, I took some pictures to back up my observations.

First, the house is perfect for its use. It’s full of sturdy yet inexpensive furnishings in all the trendy grays and blacks people love today. There is minimal art, but enough to make the place feel homey. There is enough household equipment to make it work fine as a home away from home.  People staying here don’t have to worry about breaking anyone’s prized possessions, but feel comfortable. They left some charming aspects of the old place intact, like really interesting curved walls at the ceiling, and original bathroom tiles in black and white. All good.

I think perhaps a few shortcuts were taken in the renovation that should have been addressed.

  • Photo 2 shows the area behind the door in one of the bedrooms. Oops. No molding. It doesn’t show when the door is open but DOES when it is closed. There are also holes in a weird door in the closet, which I assume is access to the bathroom pipes.
  • I don’t know what to say about screwing the medicine cabinet shut (Photo 3), but they do sell replacements.
  • Then there are the fuse boxes. Not the most attractive kitchen decor items. They could have at least hung a picture over it. Painting over the metal did not disguise them.
  • And the poor rest of the kitchen. It looks fine from a distance. Exactly what any renter or first-time homeowner would swoon over. Gray tile, granite, the beloved stainless appliances, a tile backsplash, and dark cabinets. There’s a big sink and nice faucet, too. But, Photo 5 shows that the cabinet drawer to the right of the stove hits the stove drawer when it opens, so both have to open to use that drawer. Hmm.
  • Photo 6 shows a nice-looking corner cabinet that doesn’t quite shut. The under-sink one does the same. These are brand-new and already not working right. I’d address that if anyone was actually going to live here.

So there you go. Obviously I couldn’t stop doing this job, even on vacation. I had fun evaluating this renovation, and have really enjoyed looking at all the styles and types of updates people in this area have been doing. I can see why so many people want to move to Denver, but like Austin, I can see why residents wish people would stop coming and filling the place up, too.

If you are traveling, I recommend you do a similar exercise. Evaluate an area on your own. Then look up more information on the area and see if your initial impressions were accurate. I’ll be doing that when I get home!

 

 

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How Can We Help YOU?

diagram of houe

We’re happy to help folks buy or sell, whichever works for the situation.

This week one of the people we know from networking events reached out to one of our team, saying she was having some trouble marketing a house she had rehabbed. She asked if we knew anyone who might have ideas for her situation.

As it happened, we did. This wasn’t a house we would buy from someone and fix up—it was already fixed up and looking for the right buyer. This called for a Realtor®, not a rehabber. Luckily, as we’ve mentioned before, one of our team also works helping people get top dollar for houses that are ready for retail sale. We referred her to Carol, our team member who markets our houses for us.

That is one way we can help someone who contacts us get a house sold, the traditional way.

There’s another way, one where someone tells us about a property that would be a good one for the rehab market, but for one reason or another, we can’t take the project on. We’re happy to pass that opportunity on to another of our fellow real estate redevelopment friends. Perhaps the house is outside the area we work in, or we have all the work we can handle right now. This stuff happens, and that’s why we cultivate relationships with talented people who do what we do. We’ve been told of a couple of opportunities by our network lately, too, and we appreciate the chance to evaluate the properties to see if they will work for us. There’s always a right team for a particular house!

Of course, our preference is that we buy a house, help someone move a hard-to-sell property, fix it up, and sell it to another family. Yes, we like that very much.

Contact us or put us in touch with anyone you know who might want to talk to us about their situation. We like to figure out the best path forward, whichever option works.

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