Risk/Reward

What sort of opportunity needs to be there for the investors or ou to make a move?  8648 18th Hole Trail closed a couple of weeks ago for $355,350.  It originally sold for $627,166 in March 2006, and was picked up on the courthouse steps for $236,000 in September by a "Club" member.  It was originally listed at $399, and quickly dropped to $369.  Diane toured the house and said it was "beautiful".  The gross upside  for the investor was 50%.  Was the bank lazy or asleep at the wheel or just in need of the cash?  Or did they just give up?

7655 Corso was picked by investors today.  This Lennar(Everything Included!) home sold for $341,910 in May 2006.  The bank (Ownit, partially owned by Merrill Lynch and went defunct in December 2006) let it go for $152,000 with an outstanding debt of $276,000 and change.  It will be interesting to see what this house will list for when it hits the MLS in a couple weeks.  There is another identical model on this street at 7682 that originally sold in June 2006 for $281,477 listed as a short sale for $190,000.  Even at a 55% discount from the original sales price less than 2 years ago,  this one is getting into shaky territory.

I don’t think the Pro’s would even consider a property without at least a 30% quick upside.  I know I wouldn’t.  There are way too many things that can go wrong – trashed houses,  forced evictions, seasonal slowdowns, not to mention the lack of qualified buyers out there today. 

Contrast these with 12040 Ocean View, currently listed on CL for $499,999 by a dilettante’  land baron.  This property was purchase in May 2006 for $727,810, went back to the bank in May 2007 for $629,889, and was purchased last month for $435,750.  The gross upside is a maximum is 15% .  I’m sure the drop in value from the original purchase price numbers made it look like a steal.  But what is the average DOM in this price range, like 3 years?  Carrying costs, commissions, give backs, transfer taxes and closing costs are going to cream this guy.  He risked a lot for what looked like a deal too good to pass up.  Keep your day job.

This post was put together on 4 different days, so forgive me if it doesn’t flow easily.  What I am trying to demonstrate is the HUGE hits the lenders are taking (willing or not), and that they may be pretty smart to get out now at whatever cost.  And buyer beware to any investor who thinks that just having the cash right now will lead to windfalls.  You’ve got to be smart and rich today, and even that may not be enough.

 

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About Mike McGonagle

An architect, business owner, and compulsive public records hacker, Mike reads the tea leaves of the local real estate market from a unique perspective.. A former Chicagoan, Mike earned his MArch from Harvard University. Mike can be reached at mike@macassociates.com or 775-345-7435. His continued musings can be found on the REreno.com blog.
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12 Responses to Risk/Reward

  1. Avatar inclinejj says:

    these are huge hits..wait till the commercial loans start to default

    the losses will be in the millions per loan

  2. Avatar Paul says:

    Off topic but the chase nation website is down. I need my MP fix!
    BTW incline jj I dont think we’re in for a massive commercial meltdown. CAP rates are certainly low, but will be supported by really cheap mortgage money once the banking stabilization programs start working. Vacancies will rise a bit in the recession, rents may decline somewhat, but all of these problems are temporary. Nothing like the massive over-valuation and speculation that have gripped residential. A third creek condo in incline closed recently at about 825k (3 bed 3 bath) market rent about 2100/mo, less HOA $380, $533 Prop Tx/mo NOI =14,244 /YR THATS A 1.7% CAP Rate

  3. Avatar Paul says:

    A condo unit that has a 1.7% free and clear yield is way overvalued. What do you think?

  4. Avatar inclinejj says:

    3rd Creek condos are very nice..I know that project pretty well..I was in town when the a couple units in the first phaseand all of the 2nd and 3rd phase was foreclosed on..A couple buddies of mine came up and thru the numbers around on trying to buy out the complex..there was so much for sale back then my buddies decided to pass..

    Would I buy one now..Nope too expensive..plus I am done with condo’s..would buy one to rent but wouldnt want to live in them again

  5. Avatar inclinejj says:

    Off topic but the chase nation website is down. I need my MP fix!
    BTW incline jj I dont think we’re in for a massive commercial meltdown. CAP rates are certainly low, but will be supported by really cheap mortgage money once the banking stabilization programs start working. Vacancies will rise a bit in the recession, rents may decline somewhat, but all of these problems are temporary. Nothing like the massive over-valuation and speculation that have gripped residential.

    Paul we had the same thing going on in commercial..people paying crazy prices for apartments, shopping centers and office buildings..I know of 3 REIT’s in trouble and yes 2 of them own property in Reno..One just defaulted on sr debt and one just defaulted on 1 billion dollars of mortgage debt

    when the stores and businesses start closing up shop do you think the commerical properties can debt service?

    Mike posted a post a few months ago about a couple apartment buildings in Reno getting foreclosed on..The Savings and loan mess of the 80’s and 90’s was due to commerical property melt down, then spread to residential..this is the opposite

  6. Avatar Shelley says:

    This blog needs a resident appraiser to comment here and answer questions. Such as: Do all these foreclosures count as “regular sales” when an appraiser goes out to do an appraisal for an arms length transaction? Because if they do, it would seem these foreclosures must be driving comps into the ground.

  7. Avatar inclinejj says:

    Shelley said, in December 9th, 2008 at 8:32 am This blog needs a resident appraiser to comment here and answer questions. Such as: Do all these foreclosures count as “regular sales” when an appraiser goes out to do an appraisal for an arms length transaction? Because if they do, it would seem these foreclosures must be driving comps into the ground.

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Shelly, the answer is a divorce sale or foreclosure sale is a “tanted” comp..so some appraisers don’t use them..Regardless they are a sale and bring down the values..A sale is a sale

  8. Avatar CommercialLender says:

    Paul,

    Commercial is absolutely going down; the process is already in motion. How much? Well, I have my hopes it will only effect the over-levered who bought or built 2005-2007, and the rest will be temporarily down but not out. But with any distress, it will likely effect the innocent, too (see above “a sale is a sale” comment).

    Lower valued end of the market? You can’t give a 4plex away today in some markets, even here in the Bay Area. And small retail or office landlords cannot absorb the loss of tenants like a medium or large landlord might, and we are already seeing stress there as vacancy persists.

    Rents? Going down or concessions to renew tenants are going up, or both, and in any case, ‘economic occupancy’ is trending down in many markets.

    Upper end of the market? Buyers in the past few years were paying 4% caps for MF and 5%-6% caps for office and retail. Simply unsustainable, especially given commercial rates today.

    New construction? Yup, costs were simply out of control in the past few years. Labor costs, steel, materials, copper, etc. are all coming down now, anyway, so these assets were overbuilt via their costs and will in the intermediate term not be able to compete with existing, lower-basis landlords. Some markets themselves were overbuilt, for instance look at Brentwood/Antioch retail, Reno retail and restaurant, condos of course, office in many markets (Sunnyvale anyone?). A bright spot is industrial, as little new supply was built and many older assets were torn down for housing or bought by users or churches.

    Rates on commercial paper? Don’t confuse commercial with the recent decline in some single family rates. The best apt loans today are mid 6%’s fixed, and that’s only Fannie and Freddie. Life companies are 7.5+%, banks are skiddish at best unless you are a long-time repeat client. If you can find a fully leveraged (1.20-1.25x DSC) commercial loan in the $5M+ category, it will be 7.0-8%+ fixed rate and will only be to the perfect deal with low or no rollover risk, no ‘hair’ on it at all. If you can get cheaper rates, they will be low LTVs and have recourse, and cross your fingers until it actually closes. The liquidity is gone, and that translates to higher cap rates and lower values.

    Not trying to be bleak but realistic. Let’s hope this TARP and bailout money does make its way into the economy soon, but to date, I’m not seeing it in my industry.

  9. Avatar billddrummer says:

    I agree with CommercialLender that commercial values are trending downward just like residential is. The only difference is that the velocity seems to be slower, only because there are fewer deals to look at. But he’s right on the money about the lack of financing available for marginal DSC ratios, rates in the mid 7-8% range for all but the very best borrowers (and these days, that definition covers fewer and fewer deals), and cap rates rising through what used to be the ceiling just a couple of years ago.

    As far as appraisals go, it’s a vicious cycle. (No, I’m not an appraiser, but handle property evaluations for my employer.) When I’m researching a property to find comparable sales, often the only comparable sales out there are ‘distressed’–short sales, sales out of foreclosure, quitclaim transfers because of divorce, and other things that aren’t true arm’s length, third party transactions. Because of the lack of undistressed comps, distressed sales get counted and depress current values. Then, the owner is stuck, especially if there’s a lot of surplus inventory at that price point. (I’ve seen cases where only two sales took place within a two year period, yet 15 ‘comparable’ properties were on the market. Talk about an oversupply!)

    A long answer to a short question. It’s clear to me that distressed comps depress current values. Until distressed comps become less prevalent, that situation will persist, and values will continue to drift downward.

  10. Avatar inclinejj says:

    Well now people are starting to see how foreclosures and distressed sales bring down values..

    everyone suffers the loss of value

  11. Avatar Reno Ignoramus says:

    If I may disgress a bit from the topic of this thread, although still within the category of risk/reward.

    I see where the Treasury auctioned $27 billion in 3 month bills yesterday. At a discount rate of 0.005%. For everybody who was born after 1929, this has never before happened in your lifetime. 3 month bills with an effective negative yield. Truly remarkable, and a somber sign of what the fixed income markets think about the efficacy of the $350 billion in bailout money so far spent by Mr. Paulson. Treasury investors are willing to earn nothing on their money, in exchange for the security.

  12. Avatar inclinejj says:

    RI

    Older people depend on CD money and Interest payments to life off..Unreal

    I think everyone who said this will be the worst recession our lifetimes Is right

    The early 80’s where pretty bad times..20% prime rate, high unemployment, Russians rolling into Afghanistan, recession, foreclosures etc

    I remember my teachers saying stay in school unless you have a trade cause the job market is horrible

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