Monthly Archives: January 2016

How to Assess Any Real Estate With the Approaches to Value

vThe valuation steps applied to create a supported conclusion of a defined value based on an analysis of applicable general and specific data. Assessment in creating an opinion of real estate value follows specific sets of processes that reflect 3 different methods. These include:

– Cost Method
– Direct Comparison Method
– Income Approach Method

One or more of these methods can be used in the assessment of real estate valuation. The methods to be used will rely almost entirely on the type of property being assessed or appraised; however may also factor in the use of the appraisal, the scope of work involved, and the data availability for the analysis.

Cost Method

The cost approach to assessment and appraisal is established by understanding the construction methodologies and property attributes related to cost. The cost approach is estimated by adding the cost of land to the current cost of construction related to all improvement on land, and subtracting depreciation in all improvements on the land. The construction costs of buildings would include a reproduction cost or a replacement cost of the same or similar like materials or systems. This approach works best when it used for the assessment of new or newer properties that are not frequently exchanged in the market. The actual costs are usually derived from cost estimator software, cost manuals, builders, and contractors. Note: The land would remain a separate value when using the cost approach.

Direct Comparison Approach

The direct comparison method to assessment of real estate is most useful when there is a large number of similar like properties that have recently transacted on the market or are currently listed on the market. Using this method, the assessment would come from identifying the subject with similar properties, called comparables (or comps). The sale prices that most identify with the subject would have a heavier weight on the value, oppose to one that is further from the subject characteristics. Most of the time the comparables would create a range of value, upon which; opinion must be used to find an exact value. Several elements or factors are used to qualify the degree of similarity between comparables and the subject. This would include: real property rights, financial terms, property conditions of the sale, post sale expenditures, location, market factors, physical characteristics, economic characteristics, use/zoning, non-real estate components of sale (chattels, fixtures). After the best comparables are set, a dollar figure or percentage is applied to the sale price of each property to estimate the hypothetical value of the subject. For instance comparable A has 1 more bathroom than the subject; therefore subtract $9000 from the comparable to hypothetically get the sale to reflect the same characteristic as the subject.

Income Approach

The income method to the assessment of real estate would be from an analysis of present value of the future benefits of property ownership. A property’s income and resale worth upon return may be capitalized into a current, lump-sum amount. There are two methods of the income approach; one is direct capitalization and the other yield capitalization. Direct capitalization is the relation between one year’s income and worth indicated by either a capitalization rate or an income multiplier. Yield capitalization is the relationship between several years of stabilized income and worth at the end of a specified period reflected in a yield rate. The most commonly used yield capitalization method would be the discounted cash flow analysis.

 

Time to Get Out of Real Estate

sdvTalk about exquisite timing.

Even today, a decade after the fact, the leveraged buyout of Equity Office Properties Trust remains one of the largest of all time: $36 billion for nearly 600 office buildings in New York, Washington D.C. and dozens of the nation’s largest cities.

But in late 2006, some wondered if the billionaire who sold the REIT was being a little rash. After all, the real estate boom was in full swing, and the S&P 500 was primed to hit new all-time highs. “Is he cashing out too early?” asked a Bloomberg headline when the deal was announced.

We all know the answer, of course.

Billionaire Sam Zell deftly sidestepped the coming real estate carnage. Then, with prices at generational lows a few years later, Zell bought hundreds of apartment complexes at dirt-cheap prices.

And today? Well, that’s the ominous part…

Once again, Zell is selling his real estate holdings. Last fall, he unloaded a quarter of his portfolio, buildings totaling about 23,000 rental apartments, to Starwood Capital Group for more than $5 billion.

Zell next sold off apartment buildings in South Florida and Denver, with complexes in Phoenix, Boston and other metro areas expected to be sold before the year is out.

“No one has ever accused me of not being a realist,” Zell told CNBC’s talking heads recently.

Reality Bites

Few things are more real than the threat of rising interest rates. Concerned about the Fed’s late-to-the-party threats and distorted capital markets drunk on years of zero-interest-rate policy, Zell is getting out while the getting is still good.

In the past few months, new-home sales hit their highest level in eight years. Pending home sales rose by the largest percentage gain in a decade.

Even home flipping is back in vogue again. RealtyTrac, measuring 2015 data, estimated a 75% increase in active home flippers – the highest since 2007.

Nationally, the average gross profit on a flipped home was $55,000 – the largest since 2006.

But for the realists like Zell, the widening cracks in the facade are plain to see.

For instance, apartment rent is starting to come down in New York and San Francisco – two of the hottest markets in the country. There is simply too much supply and not enough demand.

A few weeks ago, the head of the Federal Reserve Bank of Boston warned about overheated speculation in the commercial real estate market. “We care about potentially inflated commercial real estate prices,” said the bank’s president, Eric Rosengren, “because they might risk a bout of financial instability.”

Translated from “Fedspeak,” Rosengren was saying: Get out now.

Even those ultra ultraluxury homes in the $100 million and up range aren’t selling. It’s a rarefied market, for sure, but The New York Times recently noted that a record 27 properties, each with a nine-figure price tag, are languishing unsold on the market. According to figures kept by Christie’s International Real Estate, 19 such homes were on the market in 2015 and 12 in 2014.

Late last year, I wrote about one of those massive palazzos here in Florida – the beachside $159 million, 60,000 square foot Le Palais Royal. It’s still for sale.

Perhaps the extra gold leaf they painted on the front security gate will help.

Beware the Peak

I can’t see Sam Zell taking up residence in Le Palais Royal. But then again, he sold his office properties in 2006, and watched the market crack wide open a year later. Now he’s unloading his real estate portfolio again, so, who knows?

If history repeats, Zell just might find his next great distressed real estate bargains in the palatial homes of the (once) superrich – dazzling jewels of the “new” gilded age now past its prime.

 

Columbia, MO Offers Great Real Estate Opportunities

avThe real estate market in Columbia, MO is ever-changing. Columbia has now became the fourth largest city in the state of Missouri. The city gained about 10,600 residents between 2010 and 2015. This is great for real estate in the area. It has been the fastest growing city in Missouri over the past five years. Every Boone County community has seen growth since 2010 by about 3 to 4 percent, except the smallest towns. This city has a wide range of real estate from condos and apartments to single family homes. There is plenty to choose from and a great time to buy or sell.

Columbia, MO is the perfect place to live in Missouri. It is practically right in the middle of the state with St. Louis and Kansas City being less than 2 hours away in each direction. There are many outdoor activities to participate in with nearby state parks and the MKT and Katy Trail to hike and bike on. Columbia also has amazing festivals! There is one or more every month ranging from the True/False Film Festival and Citizen Jane Film Festival to Art in the Park and the Roots ‘n Blues n’ Barbecue Festival. If you are a sports fan, you can’t go wrong with the Mizzou Tigers, Kansas City Chiefs, St. Louis Cardinals or Kansas City Royals. If you like music, there are many great venues like Mizzou Arena and the Blue Note that draw in big-time artists. In the summer, there are outdoor concerts downtown during Ninth Street Summerfest. Columbia also has its own airport to provide easy access for your business trips or family vacations.

Columbia is the perfect place to live for anyone. If you are a student coming to one of our 3 great colleges, there is plenty of student housing and apartments. If you are a young professional not quite ready to live in the suburbs, there are great downtown lofts to choose from. For those of you with families, there are so many great subdivisions with amenities including pools, playgrounds, fitness centers, golf, fruit trees and more! Are you ready to retire? Columbia, MO is the perfect place! There are plenty of areas to live that are 55 and older communities. If you need some everyday help, there are also assisted living communities.

In May 2016, the average days on market for a home in Columbia was 69 days and the average sales price was $204,791. The number of active listings was down quite a bit from last year. Last May, the number of active listings was 1,208 and this May there are only 931 homes for sale. The active median list price has increased since last year from $170,000 to $194,900. Year-to-date, there have been 91 more homes sold this year than last. The most active listings currently are in the $300,000 to $399,999 range and the most new listings are in the $200,000 to $249,999 range. Currently, there is only enough inventory to support the market for the next 3 months. In April 2016, there were 930 active listings, 482 new listings and 292 sold listings.

If you have been thinking about listing your home for sale in Columbia, MO or the surrounding areas, now is the time to do it. With inventory being low, it is more of a seller’s market. Some homes are currently seeing multiple offers on them, especially those priced under $300,000.

 

Wholesaling Horror Stories

dvA couple months ago I had a client bring me a deal to fund. He was pursuing a wholesale deal and the precursory buy/sell figures looked great. I started building his file, which I anticipated to be a no money down deal with a fast close in 2 weeks. Then, he sent me the contract. As a standard practice, we always review the contract to make sure there are no “gottcha’s” that might derail a deal, and in reviewing this client’s file, everything looked good, with the exception of the name of the buyer. The wholesaler had prepared the contract using their company name instead of using a “throw-away” LLC (see below). I’ve seen this before, and it typically doesn’t cause any issues if you schedule a double closing; however, before I could advise the client, the wholesaler had received an addendum from the seller adding the client to the contract. The result: both the wholesaler and the end buyer, the client, were listed on the contract! In other words, the client, unbeknownst to him, just landed himself a partner.

As you probably know, the title for the property has to match the Deed of Trust, and both documents match the name(s) of the buyer(s) on the contract. Being as such, we had to scramble to qualify the wholesaler since he’s now the client’s partner, which completely changed the funding strategy. Most importantly, I had to have a heart to heart with the client. Did he want a partner? Was the wholesaler even willing to be partner? Ultimately, the wholesaler agreed to sign on the note and Deed of Trust, but would immediately quit claim the Deed to my client after closing and gracefully bow out of being partnered into the deal. Easy enough, right?

Wait, what about the insurance? The insurance would probably be a simple fix, similar to the Deed, but what about the note? Upon signing, the wholesaler, unbeknownst to himself, was going to be responsible for repayment of the loan without being part of the deal! More red flags. Did I mention we only had 2 weeks to get this closed??? Time was moving fast and nothing was falling into place. After many more emails and plenty of phone calls all around, the deal ended up disintegrating for many reasons, such as the seller not being willing to rewrite the contract, allowing for a proper wholesale and the two new “partners” disagreeing on structuring the deal between them. Worst part, both parties had put down big earnest money checks. Last I heard they were all trying to get their money back.

The moral of the story, before you try to wholesale a deal, make sure you fully understand how to properly structure the transfer. Here are a couple of ways to structure a wholesale:

Assignment. The easiest and best way to structure a wholesale is to do an assignment; simple, clean and easy. Usually a one page assignment of contract will suffice, so long as the contract is assignable, which most private seller offers are.

“Throw-Away” LLC. If you are buying a bank REO and the bank won’t allow assignments, the next best strategy would be to use that “throw-away” LLC I mentioned earlier, or alternatively a trust. Under the “throw-away” LLC method, a wholesaler creates a brand new LLC for the sole purpose of buying and transferring ownership in the property. The wholesaler simply sells his interest in the LLC to the buyer, and from the bank’s standpoint, the buyer remains the same (i.e. the “throw-away” LLC).

Double Closing. An alternative, and less desirable way to wholesale, would be through a double closing. This alternative results in two closings at the same time: the first results in sale of the property from the seller to the wholesaler, and the second results in the sale of the property from the wholesaler to the end-buyer. Like I mentioned before, this method is the least desirable and should be avoided if possible, due to the added costs of an extra closing, as well as the management of all of the moving parts associated with the second closing.