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Local conditions at Westport, October 8, 2007.

October 8th, 2007 3:39 PM

Local Conditions October 8^th

I hope October finds you all well! At the time of this writing, there are 135 single family homes for sale in Westport, as reported on the MLSPIN. The price range is very broad, 180k to 8.9M. If we drop the bottom ten and top ten data points, we develop a range from 249k to 1.35M, which is probably a better representation of the property in town.

The last three months resulted in 30 sales, so we have roughly 13.5 months inventory here in town. If you are trying to sell a house, that type of inventory number is not your friend. So if you are a buyer, It must be your friend, right?

Well, lets see what the numbers say. There are thirty data points (sales) in our sample, ranging from 150k to 675k, with the median at 337k. The average was slightly higher, at 381k.

The sample was split 50/50 for "presale reductions". A presale reduction is a price adjustment that has nothing to do with a negotiation, but is designed to "find the right spot" in the market.

Lets look at an example;

Jack list his house at 800k. A month later, he drops to 779k, another month later 749k. Still no action, so he reduces to 699k. Jill comes by and makes an offer of 650k, and they make a deal at 675k. As far as the MLS is concerned, this was a 675k sale on a 699k List, or a price reduction of 7%. However as you can see, Jack reduced his list price 101k, or 12.6%, before Jill even considered the property. So Jack had presale reductions of 101k (12.6%), and a sale discount of 24k (7%), so his total discounts and reductions were 15.6% from his original price.

As I said, 50% of the market sample had to reduce presale. The average total reduction for this sample (presale and discount) was 19.5%.

Compare that to the 50% of the market which had no presale reduction.Their average total reductions was 4.9%!!! Even more telling is the average days on market for the two groups, 84 compared to 235.

Even more surprising is that when you take away the presale reductions, the group that had averaged a 6.3% sale discount, compared to a 4.8% discount for the group that had no presell reductions. Overpricing cost them market time, which resulted in lost dollars at sale, about 5k for the median sale! It is far better to price it right at the outset in a down market, rather then hold out hope that “someone will come along”. They come when the price is right.

For buyers looking at this, it is ever more reason to get a real estate pro to work with as your agent. There are lots of buyers who might say, “I got a great deal. They discounted 15%”, but if it was 15% of fantasy, what does it really mean. Focus on price alone is a pitfall. Focus on location and quality, the first principles of real estate.

Posted by Michael Powers on October 8th, 2007 3:39 PMPost a Comment (0)

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There's some that can, and some that can't.

October 17th, 2007 10:55 AM

All things, given time, revert to form, to what they are in their first principles. The real estate market, in first principle, is nothing more than the interaction of willing and able home sellers with willing and able home buyers.

The market is segmented by geography (Boston v. Atlanta), by type (Single family v. Multifamily), and most importantly, by Ability. Today I want to talk about this part of the market, of those who are able, and those who are not.

When you look at the market today for any segment, you really see two markets. We have the seller who's price is constrained by his mortgage. He can afford to pay his mortgage, but can't afford to show up to a closing table with a check for 15 or 20 thousand dollars. This is the seller who wants $349,000 for his three family in Fall River, MA. The rent roll is a thousand dollars a month, but "they're great tenants", he says. The home doesn't need much, and "you could convert it into condos" (Ah, those were the good old days)!

With a little research, you find this property will not cash flow as an investment and cannot be intelligently financed at this price, and more often than not, it is owned by MR/MRS SMITH, and if they are particularly unlucky, they bought the house in Mid 2004, for $290,000. They added a heloc, (because they knew housing could only go up) and all of the sudden, they owe $320,000 on the house. There are lots of homes on the market owned by MR/MRS SMITH.

Contrast this with another three family for sale in Fall River. This is assessed for similar value to MR/MRS SMITH'S home. Is also a three family. It is vacant, and it is for sale for $229,000. It is owned by THE BANK. THE BANK's property can be intelligently financed, can cash flow, and can make sense as an investment.

With a little research, you see that THE BANK bought this house for $320,000 30 90 days ago. They purchased it when they foreclosed the mortgage. There are lots of properties on the market owned by THE BANK (and more coming).

And here is where ABILITY comes into the picture.

THE BANK can afford to sell for a loss, is in fact happy to sell the house. Where MR/MRS SMITH can't write a check to close, the bank can. In fact, the bank can give the property away, if it really wants to.

Is there a quality difference in the structures? Maybe, but as an investor, you are not buying pristine paint or wainscoating, you are buying an asset whose value is derived from the cash flow it can produce. If it can produce enough cash to cover a mortgage, then we say it can be intelligently financed. Generally, the cost of capital for multifamilies, non-owner occupied, is going to be 7.5-8%. So if you are going to buy something for 300k, it needs to NET about 24,000 to even begin to make sense as an investment.

You can't blame MR. SMITH for trying, but he shouldn't get the moving van lined up anytime soon. Not as long as MR. BANK is in the market.

Posted by Michael Powers on October 17th, 2007 10:55 AMPost a Comment (0)

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