CityLife Real Estate Blog

Aside from the usual hoilday slowdown, the Houston housing market continues to click along. The out-of-state investor business should continue to pick up, but Realtors need to be wary of these folks. I don’t know how many California “investors” have called to ask me to send them investment-grade listings. When I send them a Buyer’s Rep Agreement first, I never hear back! Basically these guys are looking for every Realtor in town to show them a listing, and then they’ll hire an agent who will kick them back almost all of the commission. NEVER WORK WITHOUT A BUYER’S REP. EVER. NEVER EVER.

Anyway, coming back from that tangent…….

I continue to be optimistic about the future of our market. While prices in inner-loop and inner-beltway properties continue to climb, we are nowhere near a ‘bubble’. I know it has been said over and over again, but Houston is one of the most affordable cities in America. People are moving here from all over the country, because they can live in the best parts of the city for the price of a Los Angeles or Boston middle-class suburb.

This website needs no introduction. Just watch & smile. And take the tedst.

www.tedtruitt.com

I am a big buyer of real estate & investing books. My uncle (who is an investor that I work with on a daily basis) told me a long time ago that: “if you get one good idea from a book, or tape, or seminar…. it was worth the money”. I wholeheartedly agree!

The bookshelf behind my office desk is filled with real estate sales books, real estate investor biographies, and ‘millionaire’ books. I have to admit that most of the books from the latter category are full of crap, and many just regurgitate the same information. In almost every book, however, I find one little nugget that makes the $24.95 worthwhile.

You know the Carleton Sheets tapes? Yes, I own a few. No, I don’t buy into most of what he says. But…. YES…. there are many things that Carleton brings up that make me think. And THAT’s what makes it worthwhile. You have to get that seed planted in your head and work the problem while you’re driving. While you’re lying in bed. While you’re jogging. I find that my best ideas all come from a ’seed’ that germinates while I’m doing something mindless.

I have taken the advice of my web guru and moved my blog to WordPress.  The move is mostly so I can point my DNS servers from blog.citylifebrokers.com to citylifeblog.wordpress.com.  WordPress also seems to offer more customization options.  Blogger was easy to use…. it just wasn’t powerful enough for me.

You may have noticed that I moved some posts over here.  I have not been very faithful with updating my blog, and I only moved the ones I thought were worthwhile.

I plan on blogging more this year, so stay tuned!

When figuring out the ARV of your rehabs, there’s a little more to it than applying the highest price per foot (PPF) comp. As I mentioned in another post, there are some unscrupulous wholesaling companies that trick a lot of first-time investors by using that method. There are several other considerations:

1. What’s the most important thing in real estate? LOCATION. If your property has a less favorable location than the highest comp, you’ve gotta figure out what the discount is. For a really bad location it may be 20% or more. (And expect a longer sales time)
2. Average square footage of comparable sales is another big factor. Appraisers talk about conformity, and your property must come close to conforming to the neighborhood norms. A general rule is that smaller square footage properties tend to bring a higher PPF (trending UP towards the median prices) while larger-than-average properties will bring a smaller PPF (trending DOWN towards the median prices). I usually tell folks that +/- 200 sq ft of the average you are safe with the simple math.
3. This is another one that falls under conformity. If all the properties have a garage, and yours doesn’t….. you gotta discount. If all the homes are 4 bedroom while yours is a 3, you gotta discount! Any feature found in the “average” home in your area that yours is lacking must be accounted for! Conversely, you cannot always give credit for extra or unusual features. The best example of this is a swimming pool. I have people tell me all the time that they spent $20,000 on their new pool, so their house should be worth an extra $20K. Pools are a funny thing, and should probably be covered in another post….. but the short answer is that many people see them as a liability (financially and legally) and do NOT want one. The only instance that you would give a pool any real value is if the average house has a pool. This applies to other things such as hot tubs, really high-end appliances, extravangant mouldings, etc
4. Aesthetics. Here in Houston a majority of the homes were built during the post-war 1950’s boom. While most of these one-story ranch style homes are attractive, this is also the era that produced what is now called the “Mid-Century Modern”. Also called “contemporary” homes, these elevations featured flat or low-pitched roofs, unusual stonework, globular light fixtures, and all the cutting-edge technology of the day! IN GENERAL, these houses are not as desirable as the ranches, and typically do not bring top dollar. There is a contingent of Mid-Cen fans out there, and lots of them restore these homes to their original George Jetson-like 1950’s ‘charm’. One neighborhood where these houses are common is Glenbrook Valley. Click here to visit the neighborhood website to get a taste of this era of home.

There are exceptions to any rule, and it only takes one buyer that falls in love with the house to make your deal great! The question is, when figuring out what you can pay for a house…. do you want to gamble on that one buyer coming along?

I hope these few tips will help you avoid some of the pitfalls in estimating your ARV or in pricing your investment properties!

Here’s an excellent example where the Location Law was broken. This is a house on the corner…..at a stoplight….. of the main thru-street for the subdivision and the OTHER main thru-street for the subdivision!

I don’t know what came over the dude to try this deal. He was probably suckered into it by his realtor. Realtors who don’t know a neighborhood and sell junk properties to investors bother me almost as much as wholesalers.

They paid about $156,000 for the as-is house (too much). After really doing a pretty nice remodel, they listed the house for $309,000. This was at a time when nothing in the neighborhood had sold for over $290,000. We are currently 365+ days into the deal, and the price is now down to $279,000. Still higher than where it should be listed. On a rehab loan this size, he is probably paying about $1500/month in interest. So over the last year he has paid about $18,000 in interest alone. Had the house been listed at $259,000 or so to begin with, he would probably have already sold it.

This guy came into an open house I was doing over a year ago (when he was working on the house) and bragged to me about how he was getting into ‘investing’ and how that house was a killer deal that was going to make him a bunch of money. Didn’t ask my advice. Knew everything. Pffft.

I feel bad for the dude, but that’s what happens when you (A) think you know what you are doing without ever having done it, and (B) ignore the immutable laws of real estate.

People think they can watch “Flip this House” or “Extreme Makeover Home Edition” and remodel a house. Pffft.

FOLLOWUP TO THIS DEAL:

They couldn’t sell the house & ended up leasing it.

Unethical individuals and organizations bother me more than anything else in my line of work.

There is one Houston branch of a national “wholesaling” company in particular that makes a ton of money by ‘wholesaling’ properties to investors. They tie-up properties as cheaply as possible, give their estimate on what it’s gonna take to rehab the property, add $15K to what they have it under contract for, and sell their position to another investor… usually a novice.

Now I have no problem with wholesaling per se, but when it’s done unethically, it really gets under my skin.

Here’s are my main beefs:

• They take advantage of newbie investors who are too green to know how to research what they’re being fed

• Their rehab estimate consists of what they think it will cost to throw unlicensed Mexican contractors at house for a couple of weeks, use the cheapest possible Home Depot materials, and slap it back on the market.

• For their estimated After-Repaired-Value (ARV), they take the highest comp in the neighborhood, and tell everyone that that’s where it’ll sell. They don’t take location (the most important thing in real estate), square footage extremes (more to come on this in a later post), or aesthetic concerns in account.

The result? Newbie investors buy the house, spend twice as much money as they were told, and sell the house for far less than they were told.

Here’s a real-life case study in one of my favorite neighborhoods to work in: Willow Meadows.

There was a house that I’d been keeping my eye on as a possible deal for one of my investors. The location wasn’t the best (it was a corner lot close to a big utility easement), and it did not have a garage, but it was a nice big house that I suspected could have been bought for a good price.  It was in a hot market area at a hot time. It was listed at $260,000, and I thought it had the potential to sell at about $340,000 with a sizable location/no garage discount.

The very day I was going to write an offer, I hear through the Realtor grapevine that my favorite wholesaling company got it under contract for an “all cash deal” at $230,000. That night while browsing the real estate section of Craigslist, I saw an advertisement that went kinda like this:

BELLAIRE INVESTMENT
ARV (after rehab value): $ 369,900
purchase cost: $242,500
estimated rehab cost $ 45,000
——————
investor buy price: $287,500
Profit $82,400 (% 22)

I had already run the numbers. And…..I *know* this neighborhood. Their rehab costs were low by about twenty grand, they don’t take any ’soft’ costs into account (loan costs, commissions, closing costs, etc which come to around twenty grand), and they overestimated the ARV by about another twenty grand.

SO……… $60K later you’re down to $22,400 in profit. IF IF IF IF everything goes as planned (which it never does in this business). Now don’t get me wrong, a lot of new investors would still be happy with $22K. But for the risk involved in a deal of this size (with marginal location no less) I would have a tough time talking my legit clients into this deal.

I guess I shouldn’t care so much about whether or not these folks get lied to and lose their shirts, but it gives everyone in the business a bad name. We already have enough PR obsticles to overcome as it is.

Oh… the outcome of that deal? I’ll let you know. The home is currently on the market.  He did a great job on the rehab, but went waaaaay over the wholesaler’s budget.  He is a really nice guy, and I hope to direct him to some good deals in the future.