By Inman News, Thursday, August 23, 2012.
By CHARLES E. CARRIER
As the economy continues to move forward, slowly and erratically, there are considerable opportunities involving the purchase and sale of distressed homes. These circumstances vary significantly across the country, which is why it is useful to understand the profile of the markets and the investors who operate in each city.
Dallas-Fort Worth represents a classic “investor” market, as opposed to a “speculator” market. The characteristics of the former, which are relevant for reviewing the real estate market in any given area, include: income and rental rates that align with property values; a moderate level of new residential construction, even during the real estate boom; a large, diverse and stable economy; and solid population growth and demographic trends.
Based on these criteria, a real estate agent or broker should be able to work with a core group of long-term, seasoned, local investors who act as a stabilizing force on the market.
In fact, many of the problems responsible for the collapse of the real estate market elsewhere — rampant speculation, easy access to credit, lack of financial oversight and a boom-to-bust mentality — are not as prevalent in the Dallas-Fort Worth area. Apply these factors to other cities, and you will quickly know the relative health of the real estate market in your city.
For sellers, this means that realistic exit strategies from otherwise tough situations continue to exist. For neighboring homeowners, this improves the likelihood of price recovery — thanks in part to the liquidity and property improvement enabled by the financial community.
Compare this approach to the dynamics in Southern California or Las Vegas. Rapidly increasing prices bring speculators and even less scrupulous actors to a market where the situation devolves into “buy/fix/flip.” The mentality is to get in and out quickly, before the bubble bursts.
As prices rise, there are no cash flow investors — rental rates are inconsistent with property values, and renting becomes only a way to minimize loss while holding a property for more price appreciation.
The ability to accurately evaluate property becomes difficult as traditional valuation techniques break down. Inevitably, inexperienced buyers and out-of-area money enter the market. Investors not familiar with the street-by-street, neighborhood-by-neighborhood variables of an area become more prevalent, and an already difficult situation worsens.
In this win-lose scenario, many people lose money, and sellers are left with few or no options. After the market crashes and bottoms, speculators come back into the picture and the cycle repeats itself.
One lesson we can learn from Dallas and apply to other locales, which is different than Los Angeles or Las Vegas or Phoenix (another city undergoing a severe bust), involves the type of investor who enters the marketplace. This point is significant because, when I counsel sellers and review market data, properties must meet certain criteria.
Listings need to satisfy the interests of seasoned experts who know how to deal with the reality of a challenging environment. For example, a purely speculative investor who relies more on emotion than analysis may not know the history of a neighborhood, the strength of the rental market, or the repairs needed to transform a neglected home into a profitable investment.
Remember, distressed homes in a distressed marketplace require a radically different mindset than the outlook for a traditionally functioning real estate market.
The surest way to understand pricing in a distressed marketplace is to invest capital and take a risk position on a property — this is the unique perspective that a veteran real estate agent, broker or investor offers. Which means you must analyze the evaluation of properties on both a “market comparable” basis, and also as a long-term cash flow investment. In higher-priced and more speculative markets, a different approach applies.
The renewal of distressed properties is a win for everyone. By turning these homes around, and through our efforts on the ground, neighborhoods improve and price stability returns.
Equally important, recycling these distressed properties into quality retail homes (and clean rentals) aids those owners who are currently underwater on their mortgages. Experienced local investors who have a stake in the long-term economic viability of a community are completely aligned with the interests of homeowners.
That’s a recipe for success.
Charles E. “Chas” Carrier is a principal of We Buy Ugly Houses Dallas, a HomeVestors of America Inc. franchisee.