Real Estate Investment in Possible Non Bubble Areas

By Randolph

According to the 2006 HSBC report, A Froth-Finding Mission, Detecting US Housing Bubbles and associated spreadsheet model, not all local real estate bubbles are created equal.  In fact, the Case Shiller Index reveals that a handful of metro markets may well be seeing price recoveries.  Denver, for example, looks to be one of those on the leading edge of the recovery, having potentially already come through the worst of it.  Others, such as my own San Francisco, have yet to really even start into an honest correction cycle (another CSI view of superbubble San Francisco).

Is it time to start investing, or at least preparing to invest in non-bubbly metro areas?

(Topic suggested by a reader)

Comments

[Brand]

To be honest, I'm starting to feel tempted in Fort Collins. Inventory is rising, prices are coming down a little and there are a couple REO properties on the market. Quite a few short sales advertised, and very few (if any) are in the "typical" $100/sq.ft. 2500 sq.ft. single family neighborhoods. Many short sales on the lower end, and quite a few in the $400K+ range. Here that's going to get you a brand new 3000-4000 sq.ft. place with SS and granite on 0.5 acres. There's a sweet condo development about a mile from work that I looked at in 2003; prices have come down to $150K-ish from $175K+ for a 2b/2ba, 1000 sq.ft. with 1 car detatched. I might drive my car twice a month in that place. Thus... temptation to cut a deal. Especially with some REO units over there moving the comps down and lenders seemingly eager to sidestep the foreclosure process.

Interestingly, I think some REO is filtering back onto the market, but it's unadvertised as such. Is there a law that requires REO to be identified in the MLS listing?

[randolfe_]

Brand

Have you been reading the Zillow blogs at all? I just ask because this topic comes from a Zillow blogger who suggested it precisely for the reasons you describe. There is another guy on there who runs a scale finance operation that claims to be buying REO in bulk from major banks -- like 50 properties per pop -- at 50 cents on the dollar, then recycling to investors for around 65 cents.

I know nothing about CO real estate, but from these rumblings it sure sounds like the ground is becoming fertile for big-money and shrewd early players.

[Alex]

Hi, A good real estate investmenting coach has five basic traits. When these traits are used to help you move forward in your life, the results are amazing. A coach can help you increase your production and enjoyment in life and help you craft a life of long-term success.

[Randolph: Hi Alex. Unsolicited advertising is not welcome on this blog. If you wish to discuss the topic, and in the process refer to your own services, that is fine. But simply teasing with "five basic traits" is not fair game. We'd be more than happy to discuss, debate and criticize those five traits though.]

[Nic]

Brand,

We have been investing on the front range for the last year or so and all we buy are REO's and short sales. Alot of times the homes need a bit of TLC other times completely redone. I posed this question to randy on the zillow board to see if i could get others opinions on whether buying now in markets that were not affected by the bubble areas problems of steeply escalating prices. Our plan is to buy at 55% to 70% of appraisal, rehab, then hold for 3 to 5 years to hopefully see appreciation in that period.
Has anyone else thought of doing this in non-bubbly areas that are still affected by the over building but not steep artificial price increases? What are your strategies? Or has anyone actually began doing this and had success or failure? What mistakes were made, or what worked really well>'?

Thanks....

[Brand]

Nic, where on the Front Range are you buying at 55-70 cents on the dollar?

[Nic]

Mostly in the Greeley market as it is the easiest area to pick them up cheap. Actively look in Windsor and surrounding areas but they are harder to pick up in those areas as they are little more desriable than Greeley.
But the prices in Greeley are VERY low and therefore easy to cash flow, in our opinion since we didnt really see the huge runnup in prices am hoping that we wont see the crash that other inflated areas will see...
Have you tried your hand at investing in this area? How are you looking for them?

[Brand]

Nic, I am mostly looking for a home in Fort Collins. Becoming a landlord is too much work for me. Mostly I use CoHomeFinder.com to search for properties; I like the blog feature.

Wasn't Greeley the per-capita foreclosure capital of the country for several months running? The amount of REO over there is astonishing. But I have heard comments that properties by UNC become steady rentals. How much net cash flow (rent - PITI - maintenance) are you getting in Greeley?

Windsor still puzzles me. I don't know who is buying those two acre "estate lots" at $200K a pop. Or the mini-McMansions down by that new golf course.

[Brand]

I will admit, btw, that there are some nice homes in Greeley for cheap. It's just too far of a commute to Fort Collins, especially in winter. But there are some beautiful places like this one in Greeley that I couldn't touch for less than $350-400K in Old Town Fort Collins.

http://www.cohomefinder.com/p/80631/473183.htm

[nic]

Cash flow varies from property to property on some pretty good, others close to break even depending on how good of a deal is gotten...The end point would be to hold through the credit crunch and housing slow down to come out on the other side smelling like a rose(fingers crossed).
Funny you brought up the golf course over here as that is where i actually live. Not in the huge places though, ya some of those lots on the water are actually going for 500k if you can believe it! But inventory is rising on the south side of the development and word is alot of those builders are close to losing them, so that may bring down the prices a bit. Thought the overall market in windsor is sustaining pretty well with VERY few reo's and when they do come on the market they are snatched up pretty quickly.

[apostasy]

Greeley still has occassional issues with the stench that comes in from the dairies and feedlots surrounding it. It still seems a solidly agricultural town, and prices still seem too speculative given that aspect.

[Brand]

apostasy: Can't you buy a 2000 sq.ft. turn of the century Victorian in Greeley for under $125K? I mean, that's not really *that* bubbly. The new stuff does make me chuckle, as those homes are asking like 2-3x what the older homes sell for.

[apostasy]

That's around $62 psf on the principal alone. Toss in interest, taxes, insurance and maintenance, and we're easily looking at $130 psf. Supportable with out of town income, but just seems out of alignment with local income levels if you are looking out over the next 30 years.

[Brand]

apostasy: That's not an apples to apples comparison. Sqft cost contributes to principal. PITI is a recurring cost and is non-recoverable.

With a 20% downpayment ($25K), the 30 year fixed rate at 6% goes for about $500/month. That is certainly affordable at a post-tax level, even in Greeley. Smaller houses are much less expensive (in the $50-75K range), and thus affordable even by agricultural workers.

I would never live in Greeley because of the incredible stench. On a windy day the Greeley smell is potent even on the west side of Loveland and Fort Collins.

[Eliza]

Isn't Greeley the town that was immortalized in Fast Food Nation as one of the stinkiest places in the US? I seem to remember some mention of crime issues, too. Have things changed enough that it would actually be a good place to invest in real estate? (I would love to hear that it changed for the better.)

Here's an excerpt from Fast Food Nation (the reason that I know about Greeley at all):

"You can smell Greeley, Colorado, long before you can see it. The smell is hard to forget but not easy to describe, a combination of live animals, manure and dead animals being rendered into dog food. The smell is worst during the summer months, hanging heavy in the warm air, almost assuming a physical presence, blanketing Greeley day and night. Some people who live there no longer notice the smell; it recedes into the background, present but not present, like the sound of traffic for most New Yorkers. Others can't stop thinking about the smell, even after years; it permeates everything, sickens them, interferes with their sleep."

More here:
http://www.thirdworldtraveler.com/Health/Cogs_Machine_FFN.html

[TH]

I know this post is more than a month old, but let me comment.

I'm really surprised to see smart people thinking about investing in real estate. We are clearly just past a peak in the perception of value of real estate as an investment and heading for a long downward slide that may last years. By that I mean 2006 is probably the last year that real estate investment is seen as a "sure thing" and every month of bad housing news since has and will erode that perception in the pessimistic direction.

Without perception of value to prop up the real estate market, what is left? Actual value. But actual value is pretty poor historically, if I recall. After inflation, didn't real estate as a whole give barely 1% returns after inflation between 1975 and 2002?

So, if perception of value disappears, as it seems would have to happen with the steady drumbeat of bad news since 2006, real estate investment returns will revert to the norm, or well below most investment classes. Thinking otherwise seems to me to be bubble thinking, not POST-bubble thinking. IMHO

[nic]

TH-We are speaking of specific markets where artificial inflation to a large extent didnt run umuck as it did on the coasts and other bubble areas. Due to the recent happennings in RE these areas are still seeing foreclosures due to sneaky lending and greedy builders.
In the market being discussed above my company is actively buying foreclosed/distressed properties at substatially less than they cost to build. Example:Just entered PA on a 3/2 2800sqft 2 year old home that originally sold for 225k and we just got it for 135k(know the builder and that was much less than the cost to build. So even if we do slide backward lets say 20% or so, we are still in good position, no?
Not saying i am right its just our current strategy. I actually asked the person who runs this site to post the topic in order to get other outlooks on it so i appreciate your insights.

[Brand]

I have mulled over the conundrum that the best deals seem to be from builders who over-reached. Problematically, many of them used quick and dirty construction techniques that do not lend themselves to durable properties. Construction from the 70s and 80s seems far sturdier compared to the 90s and beyond.

[randolfe_]

Eliza

I take that account with a grain of salt for a few reasons:

* Although the narrative is poetic, it is obviously projecting a bias;

* Many areas of the country are "stinky" by any reasonable account. Where I grew up there were enormous pig farms. Seasonally, the stench was impressive. Out of season we had the sulfuring aroma from the local silicon wafer fabrication factory. I don't recall if the author has much experience with "flyover" states, but pretty much everywhere in the country outside of idyllic coastal communities "stinks";

* As an investment decision, I don't care if somewhere stinks. I only care if there are good values to be had which are likely to produce positive future returns.

[randolfe_]

TH

I had started posting articles suggested by readers. I'm actually backed up with a handful of other suggestions on a couple of topics which I have yet to post. I've been distracted with a project for the past month or so.

I think the discussion about whether less-bubbly markets are oversold is a valid and useful one. I know, for example, that in certain areas of the Midwest it is actually cheaper to pay mortgage+taxes+insurance than it is to rent. This may or may not represent a buying opportunity, though, because it is largely a factor of terrible unemployment.

[TH]

nic -- below-cost in a non-bubbly area as a commercial rather than private investment sounds a good deal safer.

"I think the discussion about whether less-bubbly markets are oversold is a valid and useful one." -- randolfe

I agree. But the conundrum is as you point out: too close to bubbly areas and bubble affects may have caused overbuilding which will hurt returns for a while; too far away and the area likely has its own set of problems in fundamentals.

[nic]

"nic -- below-cost in a non-bubbly area as a commercial rather than private investment sounds a good deal safer."

Not sure i know what you mean by this, pleae clarify...thanks

[TH]

nic, you said the deal is below builder cost in an area not so much a bubble market and your venture appears to be commercial rather than private (and I assume the company holds the risk) which, all together, is a much safer investment than I originally assumed.

[Eliza]

From the little I have heard, Greeley is a bad place to live. I probably would not want to live there. But you are right, as an investment, it could work out. Say the main industry leaves. You are left with what could become a cute town in a decent location--at least after a little development and general clean-up. Say the main industry stays. You have a steady stream of renters. So, yeah, I suppose you are right. It could work as an investment for someone near enough to manage either situation well.

I have spent time in the flyover states, and they are not always beset by weird odors. But maybe I've just had good luck in avoiding the more odiferous times of year. :-)

[Brand]

nic, I'm curious if you've also noticed what appear to be builder bankruptcies in Northern Colorado. Alford Lake in north Loveland appeared to be about halfway through the development; now many homes in there are REO or short sale. They seemed overpriced for the area, though.

http://www.cohomefinder.com/browse-ci-Loveland-sub-Alford-Lake-homes.htm

I personally expect this to happen a couple more times in the Fort Collins / Loveland / Windsor / Greeley area over the winter months.

[nic]

brand-Ya thats happenning a bit and contributing to the opportunity in my opinion. I, personally wouldnt buy a builder bk property as i would think it would be overpriced cause alot of them lived on the const. loan but still contributes to the lower prices. We are targeting the distressed properties that are being given away by the banks.
Everybody has their own opinion but i think buying under cost for them to build will pay off in the end. Not saying its foolproof, but its just my opine....

[Capitalism]

Watching housing bubbles has always been interesting to me. Housing in Arkansas, were I reside, is currently increasing -- although at a level that is nearly laughable.

[SanFranciscoJim]

Any place that made sense purely as a buy and hold investment for the rental income would be worth considering. What is the IRR on these properties?

I looked at some of the harder hit areas in the High Desert region of Southern California, and while they are down 25% from their peak, they need to drop at least another 25% before they make sense as an investment. They are selling for about $150 sq/ft but back in 2004 they were selling for 2/3 that.

[Henry]

The people are opting to buy a foreclosed house as they are in the phobia that they can own a home at less than market price.

[Hamed Elbarki]

When do you anticipate your "correction cycle"?

[Chuck Marunde]

I love this stuff. Thanks for your post. I hope people realize how valuable this kind of information is.

[Hamed Elbarki]

Hopefully the worst is over with - it would be nice to see them recover.

[Colorado Springs]

Great discussion!

[Lise Raev]

Hopefully the worst of the "housing bubble" issues are over. Brand mentioned that Fort Collins was looking up; I hope so. I've been checking out fort collins property myself.