I’ve written several times here about my search for bargains in the real estate market. With various regions of the U.S. down more than 40 percent and 30-year mortgages heading toward 5 percent, it seems that it’s a buyer’s market.
It’s not as easy as it seems, though. In Los Angeles last week, I found no greater abundance of homes that “pencil out” as income properties than at any other time. In fact, the single best income property I ever bought fell into my lap in 1999, hardly a buyer’s paradise. I’ve seen nothing like it since.
Buying property for income is a straightforward process. You add up these:
Then, you check the local market to see what rental fee the property will support, and the type of people the property will attract. If the rental fee will cover the sum of outlays, then you have a positive cash flow property. It “pencils out,” as realtors say.
I mention the type of people the property will attract because it brings more than a financial factor. If a property pencils out but is in an area that has few desirable tenants, it will be a constant source of stress. You want pleasant people in your life, and tenants are in your life even if from a distance. You don’t want payment problems, destroyed property, unreasonable demands, and other classic marks of a terrible tenant. You want to rent to people who love your property as much as you do, appreciate improvements you make to it, and could become friends if given the chance. If no such people exist near a property you’re considering, then think twice before adding it to your portfolio.
In Los Angeles I found few properties that pencil out. The ones I did find were in areas of town I don’t enjoy driving through, much less owning property in. A third challenge in L.A. is that banks are overwhelmed with people seeking to pounce on foreclosed homes, short sales, REOs and other forms of distressed property. Realtors told me that banks are taking months to reply to offers.
In Colorado, I’ve found a different problem. Prices are low, tantalizingly so in many cases and that’s frozen the market. How? Banks in possession of properties or in control of them because of a short sale (the owner owes more than the property is worth, and is trying to work out a lower pay-off amount with the bank) are giving up on reasonable offers.
I made an offer on a property near Estes Park last month, and discovered yesterday that two other buyers made the exact same offer. Our offers were 21% below the bank’s listing price, which is already 51% below its asking price a year ago. The bank’s response to our three offers? Three declines and yanking the property from the market on Monday. The bank simply closed its book. Nobody said a word, but the message was: “If offers are this low, we’re backing out entirely until the market improves.”
Which poses a quandary for leaders hoping to right the economy by getting the real estate market back on its feet. If buyers won’t pay asking prices, and sellers won’t accept bids, we have a frozen market. The Fed is out of ammunition on interest rates because it went to nearly zero this week. There are other measures it can take to pressure mortgage rates even lower, but we haven’t seen them yet.
Mortgage rates have fallen for seven weeks in a row. Getting close to 5 percent has enticed a raft of refinancers, but hasn’t spurred much buying. Rates may need to get a lot lower to break the logjam. A 4 percent or 3 percent 30-year, with an even lower 15-year, would make buyers willing to pay more for properties because the monthly payments still work out.
In the meantime, buyers are waiting and real estate is still stagnant.
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