Caveat Emptor for Watsonville Investors
May 24, 2009
I’ve got some clients, and they’ve got some money to invest in Real Estate. They are not looking to speculate on real estate – that’s how so many people ended up getting foreclosed on in Watsonville, and in California, and in many other places throughout our glorious but fading homeland. Rather than simply speculate, my clients want to make smart, long-term investments.
A Speculator is someone who is placing a bet – they put some money down, and their bet is that the value of whatever they buy will go up. They may have reasons to speculate that the price will rise, but it’s more of an anticipation, an educated guess. This is what so many people did wrong – they bought real estate they could not afford to hold on to, speculating that it would always be worth more than they paid for it, so they could get out, easy, and make a handsome profit for their trouble.
These clients of mine are probably not what you would call professional real estate investors – but they want to buy real estate as if they were – and after they do buy a few properties, and if they keep with it, hey, before you know it – they will be professional investors, after all, every professional has to start somewhere.
One of the primary things an investor wants is a good “cash on cash” return on investment . That is, they want to put up some cash, and have that cash investment return them money, put money back in their pocket, each and every year. So let’s say you put $100,000 down into a property, and you want to get a 10% return on your investment – that means, that after all expenses and costs, you get back $10,000 pear year on your $100,000 invested.
And that is where a lot of investors go astray, I think. They don’t have realistic numbers as to the income the property will generate and the costs that owning, financing, maintaining, and renting the property will incur. As it happens, my clients went on to my web site and found my handy Excel spreadsheet for income property analysis. It’s a really great tool (to be used for estimating purposes only, of course! Contact your legal, tax, and accounting professionals before making any investment decision!) to help you figure out what kind of a return you can expect on any given property.
There are some key numbers you need to know. The first, is the interest rate on the loan you will be getting. This is tricky – many times, your loan broker will quote you a figure, and then your actual interest rate turns out to be 1/4 or 1/2 or even a full percent higher than that. Make sure you ask for your Good Faith Estimate from the lender so you will know what your actual interest rate is going to be, and if you have to pay any points to get it.
You will also find out how much of a down payment is required. At first, my clients were figuring they’d only need 20% down for a non-owner-occupied real estate loan. Their lender informed them, when asking about their actual rate, it would be 25% down.
Another key bit of information you’ll need to know is, how much can you actually rent the property out for? The rental market in Watsonville has been extremely tight of late, and rental prices have been very high – or have they? I had recommended my clients look on Craigslist and also on Zilpy.com to see what the rental prices were looking like. The problem with that, though, is that these are asking prices for rent. It does not mean that they are the actual prices people are paying.
When you’re an investor, every month a unit sits vacant kills you. If you are asking too much for rent, you are not going to attract the kind of quality tenants you are looking for. You need to price the unit well for quick rental to attract quality, long-term tenants.
I talked to a property manager down in Watsonville about the rental situation. She said that the rental market had softened considerably, especially since the Housing Authority of Santa Cruz County had put a freeze on new housing vouchers. Ouch. According to the lady I spoke with, actual rents in Watsonville are now down about 20-25% from a year ago. D’oh.
What this means for my clients is that the amount of money they can afford to pay for a property, given their higher interest rate and lower rental rates means that they can offer less for a property than they had first thought – in order to make that 10% (or near 10%, anyway) cash-on-cash return on their investment. And there’s another important factor to consider for you number crunchers out there – closing costs and fix-up costs. It could be you need 25% down for your loan, and then another $10K for closing costs and another $15K on top of that to rehab the property so that its condition will make it desirable to rent quickly and for the highest rent possible. The $100K you thought you were investing could easily look like $125K before the first tenant moves in, and if you want to get 10% back, you’ll need to see $12,500 per year free-and-clear.
While we are on the subject, let me ask this: why are rental prices in Watsonville down 20-25% from a year ago? I don’t know for sure, but here’s what I think: it used to be there were a lot more owner-occupants in Watsonville than there are today. A year ago, there were less rental units available. All the people getting kicked out of their houses by foreclosure were competing for the scarce rental stock. Now, a lot of those formerly owner-occupied houses have turned into rental houses, thereby increasing supply. At the same time, not as many people are getting foreclosed on at the moment because of the various foreclosure moratoria which have been in place. And, of course, the unemployment rate in Watsonville is reported to be at 25% – that’s huge, and I think it means a lot of people are going to be sharing housing, families living with families, rather than each family having their own individual place as I’m sure they’d prefer in many cases but owing to the weak economy cannot afford to do so at the moment.
And, one other thing: what do you think these lower rental rates are going to do to home values? Will they have no effect? Bah, humbug. I dare say they will continue to drag down property values in Watsonville, and that we have not yet hit bottom. A lot of the buyers in Watsonville today are investors – and a real investor will only be able to pay so much for a property to get the return they need to justify the considerable risk. Also, as rental rates decrease, it blunts the incentive to for someone to buy – as the chasm between monthly rent and a full PITI payment widens, more fence-sitters are likely to stay there on that fence, and continue to wait out the market.
To all ye would-be investors, in Watsonville and everywhere else in our Golden State, I say: rock on, but play it safe, and always use your green eyeshades when analyzing any real estate investment. I’d hate to see you end up like thousands of well-intentioned but mis-guided “investors” before, with your investment dollars flushed down the drain and a bitter taste in your mouth.
Posted by SantaCruzBroker at 1:00pm
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Santa Cruz Real Estate Deathmatch
March 29, 2009
One thing’s for sure – it’s interesting times we live in. Whether you think the current housing crisis is the cause or a symptom of the economic meltdown in the United States and abroad, there’s no denying that there’s a great deal of uncertainty about how long this recession will last, how deep it will cut, and what this means for people looking to buy a house in Santa Cruz today.
I’ve said it several times in various postings to this blog, but I think it bears repeating: I think home prices in Santa Cruz county will continue to drop for the foreseeable future – and by that, I mean the rest of this year, at least. This is an opinion that is apparently not shared by some people, as we see buyers falling all over themselves (and other buyers) in a mad scramble for these “bargain” properties.
A few days ago, the Santa Cruz Sentinel ran a story about what homebuyers found at close to the median price of $380,000 in Santa Cruz County. I thought it was a pretty good read. I “watched” a lot of these properties come on the market and get sold, and it’s interesting to get a report from “inside” the transaction. One thing that was interesting is how many agents said their buyers received closing cost credit (typically in the 3-4% range) – I know from my own listings that this is common place, but you rarely see this in the “private remarks” section of the MLS. It’s an important bit of information – if a house is sold for $380,000 but the seller credited the buyer $12,000 for closing costs, the house really only sold for $368,000.
Another eyebrow-raiser were the anecdotes from the buyer’s Realtors, talking about the multiple offers. One agent told of showing her client “100 houses” (nice agent!) and writing up 15 offers, before finally being the winning bidder on a house on Grant Street in Santa Cruz for $412,500.
I myself have been there and seen this a lot of late. It’s not a new thing – as I mentioned a blog entry or two ago, this multiple-offer feeding-frenzy has been going on at least 18 months, I don’t see that it is more common today than it was a year or so ago – but perhaps it’s being talked about more in the media, as there is now more effort into talking up the economy rather than talking it down.
I work with a few buyers, although mostly my work these days is with the banks, listing and selling their REO assets here in Santa Cruz, but also in San Jose, Gilroy, Salinas, etc. I have some buyers who I’ve been working with for some time – we haven’t seen a hundred houses and we haven’t written 15 offers (yet!), but we’ve written up a good number of offers and haven’t yet been the winning bidder.
The day before yesterday, though, my client sent me a link to a listing which had “0 days” on market – meaning, it had popped up on the MLS only a few hours ago. I had seen it when it had come up (I send myself e-mails from my automated system for every bank-owned home that hits the market), but at the moment, I had a number of deadlines I was working to meet so I didn’t look at the particulars to see that it was really an incredible deal. When my client wrote me about it, I took a closer look. I wrote back – “Sounds like a winner, let’s go see it tomorrow, at the crack of dawn.”
The next morning at 8:30 AM, we went out to the property and took a peak. Stunningly cheap – priced well, well below market value. After only a couple of minutes at the property, we were already talking about writing it up. As fate would have it, though, it was about 4 hours more before we would actually send the offer in. And send it we did – at which point I called the listing agent, who informed me there had been four offers, all offers had submitted their “highest and best” offers, and that the bank had just chosen one of those buyers. All of that, in less than 24 hours.
It’s a bit of a mystery why a bank would price a home so low and then not give the home proper market exposure before accepting offers. Many of the banks that I work with have a 5 or 7 day minimum market time before they review offers, and that gives enough time to attract a good number of high-quality offers. Those that do not wait a few days before reviewing offers often leave quite a bit of money on the table, it seems to me.
But that’s nether here nor there. Whether a bank takes the first offer that comes along, or waits 7 days before reviewing offers, the point is this: it’s brutal out there for buyers of these “bargain” properties. The big question in my mind is, why is there such a clamor to buy something which in many cases is going to be considerably cheaper six months from now? What is driving everyone to fight tooth and nail for these properties which are still steadily dropping in value?
There’s any number of reasons, of course. Many buyers probably think that we are at the bottom of the market. You can’t time the market, after all – it’s impossible to say just when the bottom has been reached, and usually you can only tell when you are coming off it. Many buyers have just been itching to buy for years now, and finally, prices are “affordable” – and now, declining market be damned, they’re going to buy into the American Dream.
I have a theory, though, I’d like to run it by you. My theory is that there is actually very little for sale at the moment compared to the demand that’s out there. At any one time, there are only a few dozen properties listed for sale – not already in escrow – which are well priced for today’s market. Spying through the MLS, I see every house, condo, and multi-res property that hits the market – and more often than not, I say to myself: “What are these people thinking?!”
You see, most houses just aren’t priced to sell. In order to get $700,000 or $800,000 – hey, let’s face it, even $600,000! – for a house these days…the house has got to be pretty special. It’s gotta be tight, turn-key, in a good location, or have enormous and obvious upside potential. And yet, the market is flooded with houses in these price ranges…and there are no buyers for them. There would be buyers if the houses really were turn-key in fabulous locations – however, those properties are also usually priced $200,000 more than the market is now willing to pay for them.
These days, there is absolutely no shortage of buyers in the mid-county area in the $400,000-$550,000 price range. The problem is, there are almost no properties in this price range – and this is the reason why, I think, we have this Real Estate Deathmatch thing going on. There’s just very little tho choose from at the price the market is willing to pay.
Take, for example, the listing at 3365 Branciforte Drive. I am the co-listing agent of this property. This property had actually been listed by my office for a loong time – since May of last year. But then, it was a short sale, and started out at $799,000. Actually, when it started out, I don’t think it was a short sale – but as the months went by, the price was reduced until finally the owner owed more on it than the market would pay. It was in contract as a short sale at the time the property got foreclosed on – but there was no stampede of buyers vying for it at the time.
Why? Because nobody likes a short sale. Once that property became a bank-owned foreclosure listed at $459,900 – woah. Many buyers avoid short sales because so few of them are successful. For example, this very same property – it was in contract as a short sale and then…it got foreclosed on anyway; the buyer had full loan approval and was all set to close. The buyer had spent hundreds of dollars on an appraisal and a septic inspection, all for naught. Who needs that kind of aggravation, right?
This property ended up getting 10 offers on it – this is being sold by one of the banks that lets properties sit on the market seven days before reviewing offers. It should go ‘pending’ probably on Monday, after the bank chooses the winning offer. And all this madness over a house with serious foundation issues. True, it’s got a nice lot and it’s in the Happy Valley school district, but this house really needs a lot of work.
But buyers are willing to take it on- because there’s just not a lot out there in this price range. Soon, though, the now-healthy pool of buyers even in this price range will start to shrink. Unemployment continues to rise, and lenders continue to tighten lending standards – and that’s a fatal one-two punch that even historically low interest rates will not be able to combat fully.
So if you’re one of these buyers who writes 15 offers and misses out on every one – if you are battered and bloodied by this Real Estate Deathmatch that’s going on – take heart. This is just the Universe’s way of telling you that the time for you to buy hasn’t quite arrived. Time is on your side – if the deathmatch is too brutal, there’s no harm on sitting the sidelines a while longer, so you can heal up for future bouts to come.
Posted by SantaCruzBroker at 10:00am
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Santa Cruz Real Estate in 2009
January 02, 2009
Happy New Year! I hope everyone had a safe and sane New Year’s Eve, and I hope that as I type this on January 2nd, most of you are taking the day off to spend on vacation, or with friends and family. We’ll all get back to the grindstone soon enough, but I think that after all the chaos and tumult of 2008, everyone deserves a four-day weekend to start off the new year.
Can you feel it? I’m feelin’ it. I am, of course, referring to the angst surrounding the real estate market. There are a lot of people out there who would like to buy a home in Santa Cruz in 2009. There’s also a lot of people who would like to sell a home in Santa Cruz this year, too, but feel they cannot or should not because they now owe more than their homes are worth.
Thanks to the likes of Google, many of you can easily find the predictions for the 2009 real estate market. I’ll give you a summary of what they’re saying: prices are expected to continue dropping through much of 2009 (probably all of it, if you ask me) but not by much. Interest rates should remain low at least for the first half of the year. We may start to see a rebound in prices in 2010, but it will be moderate.
The much-loved California Association of Realtors has put out a report titled State of the California Housing Market 2008-2009. Unfortunately, they want you to pay $29.95 to download the PDF, but the press release for the report’s availability does give some juicy nuggets:
- Approximately 1 in 5 home sales is due to foreclosure, short sale, or default
- Home sales will increase 12.5% in 2009 compared to 2008
- California Median Home Price to decline by 6% in 2009 to $358,000
From where I’m sitting, 2009 is looking like it is going to be the year to buy a house in Santa Cruz. I have been telling people all throughout 2008 that it’s OK to buy a house in 2008, but if you can wait, 2009 will be better. The question then arises – is it good to buy in January 2009, or would it be better to wait until, say, December?
Given that home prices are likely to keep dropping throughout the year, in many cases it will make sense to wait as long as you can before you buy a house. However, one thing that’s known for sure is that right now, interest rates are very low, and you might want to buy now to lock in a really low interest rate.
One thing that we don’t know right now is what effect the recession will have on the job market locally. Rising unemployment will add fuel to the foreclosure fire, and that will certainly increase downward pressure on prices. If the job market gets really bad and stays bad, prices could decrease by a lot more than the 6% the California Association of Realtors predicts.
Even if the recession is longer and more protracted that most fear, I still feel you’ll probably do OK buying property in Santa Cruz in 2009 – provided you are making a long-term investment.
Posted by Administrator at 6:00am
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