NEWS

Real Estate Trends Q4, 2008

Date: Feb. 17th, 2009
Phone: 000.000.0000 Ext. 0000
1/20/09
REAL ESTATE TRENDS 4Q 2008
MICHAEL CANNON

Why the current bubble?
-Avg home prices spike when inflation present
-In Denver, avg home price increase occurred earlier in late 1990’s as compared to the national averages
-Denver did not spike as high in avg home values as national avg (2001)
    Why?
    -Tech Bust = lost jobs, less $, etc.
-Over time Avg home prices grew less than inflation

Houses over a period of time, increases in value about one percent over the inflation rate…so when looking at investing and talking w/ investors – must understand this slow value increase…
    -e.g. inflation = 5%, home price increase = 6%
    -getting worse, b/c size of homes increased up until recently
    -so pr/sq ft actually decreasing

Why is Denver closer to the bottom than the US?
1.  Denver’s prices reose less (after recent declines) than the US average in RE boom:
    -Denver Up 36%
    -US market up 56%
2.  Real income growth in Denver outperformed the US ; enbles higher RE prices
    -Denver up 25%
    -us up 21%

3.  Mortgage interest rates at 35 year lows, enable consumers to purchase more home

4….didn’t get it

EXAMPLE AREA – AURORA NORTH (AUN)
1.  Foreclosures
2.  Fitzsimmons
3.  Fix, Rent, & Hold

-Investors are making these purchases
-When investors buy, prices go down or remain flat…strange, b/c so much demand.  At least prices are holding steady now (last 7 months).
-Predicting that prices in this area will begin to rise, b/c the profile of the buyer in these areas are changing, increase

-A change in DOM rend foreshadowed a change in market pricing, usually 1-3 years ahead of the market as a leading indicator…Neg correlation between DOM and price changes

Before the fall of market
-increased # of foreclosures
-prices appreciating at a slower pace
-DOM increases w/ building inventory
The Fall of the market
-# of foreclosures increases dramatically
-low cost distress sales replace regular full price
-elective sellers decide to wait or rent their homes, further reducing non-distress sales
-DOM reaches peak then inventories fall as owner occupant

Most Fix and Flippers are losing tremendously…buy and hold is best right now

-Stable prices in AUN and DSW since 2007
-So when will it go back up? – 2-3 years is the common response, but no prediction is totally accurate

-Less expensive markets have more volatility in downturns.  Traditionally they offer more potential upside in a recovery.  Buying during the downturn resulted in avg 70% roi

Stats from November 2008
Under 325 = Seller’s Market
Over 325 = Buyer’s Market

Parker, Englewood, Wheat Ridge, Lone Tree, Golden only areas in Denver Metro to have price increases between 2007-2008

Current shift in thinking on a Macro Econ level
-people will begin to live w/in their means
-will continue to shrink the economy until they begin to save

High end properties are far from the bottom – in terms of pricing – we will continue to see this drop

-REO homes under 185K are increasingly selling at a premium, not a discount – they are under contract in less than five days
-Intense competition for these properties – cash buyers are out there closing in 21 days

Guesses for 2009
-Foreclosure volume
    -will be about the same level as 2008
    -higher price points will have more REO activity
Appreciate estimates
    -<200K homes will be flat
        -reo sales will hold down prices for most of 2009
200-350K
    -do not require jumbo leans
    -have much less REO activity
    -moves are little less elective than the high end
    -sales volume hold steady and might continue to do so in  09

350k-1M
    -13 months of inventory is straong buyers market
    -jumbo loans challenging to get

(MISSED THE REST, CALL LON WELSH)



MANAGING INVESTORS – CHARLES ROBERTS
-the market tells you what to do, you cannot tell the market what to do

EIGHT TYPES OF INVESTMENTS
1.  Assignments – assigning a contract to another person
2.  Rental Condo or Rental Home (good idea)
3.  Small (2-4 units) apt. building
4.  Large (5+ units) apt. building
5.  Lease Options (rent to own)
6.  Fix and Flips
7.  Conversion of Apartments into Condos
8.  Scrapes, Pops and New Construction

ASSIGNMENTS
-If you…
-don’t have much equity to work with, and and/or if you credit power is limited
    -put property under contract that says, can assign
-essentially you can sell the contract to someone else BUT you have to get a really good deal
    -doesn’t happen much
    -no assignments in bank owned or short sale offers
-Can be a way to get started in RE investing
-You will need to have a strong “sales” personality to succeed at this
TO GET AROUND THE ASSIGNMENT ISSUE w/ REOs and Short Sales
-Put offer in under an LLC, then sell the LLC before it closes on the property
-must have cash buyers for this
-lots of paperwork, must be careful

RENTAL CONDO or RENTAL HOME
-Buy a resi property to be rented out to tenants
    -usually on a 12 month lease term
    -this is how most new landlords get started
-Property Management
    -you can hire out all of the functions
-to start = do it yourself, should be a do it yourself at least at first, so you know the property well
    -full of issues
    -problematic to work with
    -they are probably not getting paid enough
-he talks people out of making long distance purchases b/c of property management issues
-ECHO Summit, might be a good co. for property management
-ACCU, Inc. -
-Easy to do
    -smaller down payment, 20-25%
    -purchase process and financing process familiar
-Great way for beginners to get started
    -buy one to get started, something low price to try it out

-Condos = difficult to deal with right now
-HOA problematic
-Warrantability problematic

GET AN ATTORNEY IF YOU ARE GOING TO GET INTO THIS BUSINESS
Spring, Wilson, Nathan and …attorneys who specialize in evictions
(303)695-4683

-vacancy is bad, loss of $, damage to properties
-it’s a human management issue
-rents?  When raise? –he says he keeps them low especially when have long-term good renters
-insurance, if something is vacant for 60 days (typical), lose your insurance – null and void
-doubling price on insurance for rentals (coming) (opinion from class participant)

SMALL (2-4 UNITS) APARTMENT BUILDING
-Duplex triplex quadples, usually 12 month terms
-Single fam vs. these which is better???  No answer – he thinks four sing fam homes vs quadplex, same generally
-What the rental home /condo landlords graduate to
-Often cost a little more than a rental home
    -must more likely to cash flow
    -less cash flow risk
-Always have tenants pay all utilities OR raise rents
-Property Management
    -on-site assistant
    -yard maintenance and showing empty units
Meth lab – now reduced to anywhere that someone has smoked meth
-gonna get better cash flow on a four plex than a single family home
BUT
-dealing w/ water
-close neighbors with issues
-higher risk of vacancy



LARGE (5+ UNITS) APARTMENT BUILDING
-Still targeting tenants for 12 months at a time
-5+ unites considered “commercial” property
-Loans are more difficult to qualify for. 125% DCR – debt coverage ratio
    -going before a loan committee to get the loan
    -want to know about you, the property, and your history
    -difficult to get a loan for this, you need experience to get $
-Usually a larger down payment is needed
-Uncommon for the new investor
-cash flows more stable than for smaller buildings
-economies of scale
-practical and desirable to hire a property manager to take over most of the work for you
    -reduces that hassle factor of the landlord process

LEASE OPTIONS
-tenant – slightly longer term rental 18-36 months
-usually goal is tenant to purchase the property form you
-if you purchase the property – easier process
-if seller financed – lots of work to set up
    -no cash out of pocket
    -does not rely on your credit score
    -great for beginners with the right skills and attitude
-typically % of rent / month goes towards the down payment
-must negotiate terms of sale at time of lease
    -many ways to do this, pick a price point
-don’t see this too often particularly in a down market

FIX & FLIPS
-not a lot of easy money to be made here right now
-high risk
-nightmare scenario
    -puts all $ into this, and no back up plan
-Purchasing a home that needs work
-Scope varies
    -basic paint and carpet
    -to extensive overhauls
    -to scraping
-Usually does not involved tenants
-Objective: turn fast
-Great for beginners with the right skill sets or the willingness to learn
-a lot of counseling to go along with these types of clients – they need to know the risk
-he’s never seen a spreadsheet on this type of investment that didn’t lie - #s not always the answer in this case
-emerging markets good place to do this
-must know costs for rehab and account for variables


CONVERSION OF APARTMENTS TO CONDO
-combines F&F and rental
-typically don’t go well
-purchasing an apartment building
    -target neighborhood dominated by owner occupants
    -then convert to condo/rowhouse
-changes legal use
-denver county really likes this
-Often requires renovation of the units
-

SCRAPES POPS NEW CONSTRUCTION
-PURCHASING A SMALL HOME
    -expensive neigborhood
    -may or may not need work
-home bulldozed
-new home or duplex in put on the lot
-alternatively the existing home is renovated and more square footage is added on
-a pop top is adding a second story to an existing home to add more square footage (commonly a mast bedrooms suite)

8 CRITERIA SUMMARY (QUALIFYING THE INVESTOR)
1.  Credit Score
2.  equity Available
3.  Experience with contractors
4.  experience with property managers
5.  time required each week
6.  number of monthly interactions
7.  perception of hassle
8.  risk tolerance

CREDIT SCORE
-smaller properties don’t nec have to have perfe3ct credit, but need the 20% down
-large apartments – must have great credit

EQUITY AVAILABLE
Large apartment building – 20-25% down + closing costs
-if want sing prop w/ 10% down – NO – find other ways to do this

EXPERIENCE WITH CONTRACTORS
-makes some tpes of projects easier to complete
-fix and flips benefit the most
-larger apartment building that already has a competent property manager in place then you want need any experience with contractors



EXPERIENCE W/ PROPERTY MANAGERS
-easier
-not essential
-you can learn by doing

TIME REQUIRED – GETTING STARTED
-20-80+ hours per week depending on size of property

TIME REQUIRED EACH WEEK – ONGOING
-

# OF MONTHLY INTERACTIONS
-how often have to visit the property
    -visit the property
    -take phone calls and answer questions
etc…

PERCEPTION OF HASSLE
-toughest to assess, very subjective

RISK TOLERANCE
-#1 most important things
-if do not have resources to back self up when there’s a tumble…can completely destroy your financial life

REALITY CHECK
-credit, cash or sweat

SENDING FLOW CHART TO HELP CLIENTS MAKE DECISIONS AND FOR SELF