Irvine Housing Blog |  |
| Nevada foreclosure sales rise sharply in March Posted: 13 Apr 2011 03:30 AM PDT Today I discuss the latest happenings in the Las Vegas housing market. Foreclosure sales to third parties were up dramatically in March. I know. I was there (virtually). Las Vegas Home Address ... 6349 BLUSHING WILLOW St North Las Vegas, NV 89081
There must be 50 ways to leave your lender. Strategic default is now a way of life in Las Vegas. With most properties underwater and little prospect for recovery, most loan owners are wisely walking away. On 3-22-2011 I noted that Nevada has 167,564 empty houses. In that post, I made the following observation:
Guess what? Nevada foreclosure sales rise sharply in March Posted: Apr. 12, 2011 | 11:50 a.m.
February was awful. The lists each morning were thin, and the bidders on the site anxious to deploy their capital were bidding properties up to stupid numbers. March was a different story. Being patient through February was difficult.
Lenders are loading up the MLS for the prime selling season.
Anna, they are putting houses on the market one at a time to make more money. Lenders will own real estate for decades.
The market bottom in Las Vegas will be very, very long.
There is no reason to believe lenders will speed things up. It doesn't serve them. Prices in Las Vegas are so low because there is simply too much supply for the available demand. Affordability is NOT an issue there, and it won't be for quite a while. The ebbs and flows of auction bidding One of the key functions I serve to my investment fund is selecting properties to bid on each day. It's a task that requires patience and discipline in order to be successful. Each day when I have money to deploy, I obtain the list of properties where opening bids are below an estimation of market value. My task is to pull comps for twenty or thirty properties a day and establish what I believe to be a more accurate resale value. I back out my costs and arrive at my maximum bid. If this number is above the opening bid, I put it into the market and see what happens. The margin I demand varies from property to property based on its location, condition, and rental desirability, but I consistently apply my methodology irrespective of the prices paid at the auction site. Over time, I have noticed how the margins go up and down depending on how many bidders are active and how aggressive they are. For instance, I had a few closings, so I had $350,000 to go shopping last week. Monday last week was a zoo. Jacki reported there were three times as many people at the auction site, and it showed. After the auction, I like to evaluate the auction price relative to my bid. It gives me an indication of bidder aggressiveness. On Monday, many properties were sold for more than 10% higher than what I was willing to pay. And remember, it takes two aggressive bidders to push prices up. At 10% more than I paid, the best case scenario for those buyers is to break even. Many houses purchased last week will turn into losers. As the week wore on, the aggressive bidders were getting properties, and transaction prices began to get closer and closer to my bids. It told me the more aggressive bidders were spent, and I would soon be getting properties. On Monday I picked up one, and on Tuesday (yesterday) I picked up two more. I'm spent for a few days until my next closing. It takes patience to put so many bids in the market and resist the temptation to chase, but overpaying and not making any money doesn't help, so patience is mandatory. The foolish ways flippers lose moneyHaving observed the auction market for some time now, I have noticed a variety of ways people lose money. The following is my shortlist of ways auction participants lose money: Buying occupied properties You probably remember Vicente the Fox. Occupied properties are nothing but problems. In retrospect, what I see as the biggest problem with occupied properties with holdover tenants is the idle money. When I have money tied up in a property, that is capital not available for me to buy another profitable flip. It becomes a drag on returns. The further unpredictability of damage during eviction can turn the inconvenience of idle capital into the tangible pain of loss. If I have experienced these issues, others have too. Occupied properties have greater apparent margins. For those chasing margins through occupied properties, it's only a matter of time before these problems emerge. Automated valuation models are wrongSome bidders use automated valuation models to establish what they believe they can resell the home for. In fact, there are some operators out there who believe they have invented a better mouse-trap. They are wrong. Automated valuation models all have weaknesses. There is no automated model that will provide the accuracy of a human being with market knowledge and the power of discernment. Bidders who rely on these models usually end up buying those properties where their model was wrong and grossly overstated the value. The winner at auction is the bidder with the most aggressive assumptions. If their automated valuation model spits out overly aggressive assumptions, they are certain to end up with those properties. Have at it. The pattern of losses will fascinate the programmers. Failing to recognize their costsMany bidders don't know what it really costs them to prepare a house for sale, nor do they realize all the taxes and fees in the transaction. It's common for newbies to overpay and obtain little or no margin because unknown costs eat up their profits. On one of mine, I underestimated the HOA settlement price by $3,000 on a deal where I obtained full asking price. Unlike here in California where HOA debts are wiped out, HOA debts survive foreclosure in Nevada, and collection has become a racket. I have one statement where the HOA turned a $380 late fee into a $3,600 collection due. In fact, it was that one that blew out my budget. I learned to budget for a back HOA fee on any property with an HOA, and I triple any recorded lien amount. It's still a guess. Many buy properties with no idea what they need to do to prepare them for sale. What home sales background do they have? What about homebuilding experience? It isn't rocket science, and intelligent people can figure it out, but without guidance and experience in these areas, prospects for success are limited. To prepare for sale, it's very difficult to spend less than $1,500 on any property, and $3,500 to $6,000 is the norm. For older properties it can be much more. Many foolishly budget zero. And when they realize they have a problem -- nobody wants to buy their house -- they have no idea how to solve it. I hope they like the house because they will own it a while. People will bid thin until they buy a few with missing kitchens (it's happened to me. You can't always see the interior. I budgeted for it.) The few that blow up their costs blow up their venture. I always budget for a full renovation unless I have either (1) interior pictures from an occupied MLS house, or (2) interior pictures of empty houses taken through the windows on the morning of the auction. If the pictures show I won't need certain costs, I can tighten up my bid number and still get my margins. I need to be aggressive when I safely can if I want to keep getting properties. Failing to recognize the value of certain costsSometimes it is wiser to spend a few more dollars to obtain better service. I know one bidder who is attempting to deploy several million at the site. He is paying someone with little or no training to pull comps and bid on properties, and he has gone to a $300 listing agent to sell them. As you might imagine, he as overpaid for most of the properties because he usually ends up with the ones where his inexperienced agent blew the comps. Also, since he is not paying for any assistance with the listings, he is managing all his own escrows and he has problems with deals closing on time. He is penny wise and pound foolish. I use a bidding service to obtain data on the properties I buy. This service is expensive. There are competing services in the area. However, I witnessed one of these competing services buy a house with no kitchen because they were looking at old pictures. Overpaying for the wrong properties due to bad data can be costly. Despite the higher cost of the better service, it provides value in excess of its cost. Not viewing the activity as a businessThe primary reason amateurs fail at the auction site is that they don't look at the activity as a business. People go there as if buying property were a spin at the roulette wheel. Most believe they can buy anything, broom it out, and buyers will eagerly snap it up for a huge profit -- and my previous post probably fed into that misconception. The reality is flipping houses is like navigating a minefield where one misstep can be a disaster. Processing properties is akin to homebuilding. It requires a steady pipeline of properties moving through. The process needs to be managed with the urgency of an ongoing enterprise rather than a speculative wait-and-see. Those that wait-and-see in this business rarely like what they find. Trying to hit home runsRelated to the last point, those who operate as a business try to hit many singles. Amateurs try to hit home runs. It's not uncommon for flippers to buy a property put it on the market and be unwilling to lower the price to sell it. Whatever they thought it was worth doesn't matter. The market is never wrong. Those that fail to cut their losses in a declining market end up with very large losses. Buying expensive propertiesProperties prices over the median are enticing at auction because the apparent margins can be very large. The buyer pool with $1,000,000 cash on any given day is pretty thin. I try to keep less than $100,000 in cash at all times. Idle money is a drag on returns. The thin buyer pool makes for lower bids and wider margins. The problem with these apparent margins is the speed at which it can be converted back to cash. It's rare to get full asking price offers the first day of a $1,000,000 listing. And if it happened, the property was probably priced too low. The sales velocity at the high end is low in any market, but it is excruciatingly slow in distressed markets. Flipping in that market can mean holding a property for six months or more to find a buyer willing to pay top dollar. Since the high end is in decline nearly everywhere, holding out for a high price may take years, decades even. So how will I fare on this property? House Address ... 6349 BLUSHING WILLOW St North Las Vegas, NV 89081 Resale House Price ...... $86,900 ** the net gain or loss numbers in the post do not represent what I net on the deal. Other expenses usually cut the apparent margin above in half. If I obtained full asking price for this property, the fund will make about $8,000, not the $19,986 my post spreadsheet formula put out. My normal daily posts don't include other costs of preparation for sale. A 30% gross yields a 10% net. What's it worth?The following were the comps I used to value this property. They are all recent sales within the subdivision of model-match properties. Those last two sales aren't good for the comps...
If there are many more transactions in the low 80s, it may be difficult to get an appraisal for a higher asking price. That uncertainty is the business risk in a transaction like this one. How does it work as a rental?I pull rental comps to see if properties are desirable as rentals if local owner-occupants don't step up. This one is a fairly good one even for a retail buyer paying full asking price.
This is a solid rental property providing positive cashflow with a 30-year mortgage.
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