26 thoughts on “Bargain vs. A Steal

  1. I don’t think thats gonna happen. The banks are only gonna go so low with the foreclosures and unfortunately people will use this for a comparable in area when selling a home. So if your in a foreclosure area this may not be a good time to sell if you don’t want offers from the bargain hunters!

  2. I get calls on a regular basis from out-of-town and Canadian investors. They are specifically looking for bargains in Seattle. However most of them are educated enough to know Seattle is not considered a “high foreclosure area”.

  3. I have definitely been able to get my new construction clients pretty good deals, but I wouldn’t call them steals. I think some builders are willing to negotiate right now to get some properties off of their books for the quarter.

  4. I can’t believe that Seattle should be high on a list for investors looking for bargains at this point in time. Two days ago I talked to a customer of ours in the Bay area. He just bought a residential home from the bank. It was a new construction in a new “designer area” complete with man made lake and all. The home had been owned by an investor who bought 7 of them before the troubled times started. The home my customer bought was listed at $900k before the onwer went under water and foreclosed. What the bank settled for? $450k for a 4000+ sqft home with lake side and 3 car garage. That sounds like a bargain that will be hard to find around here at this time.

  5. I find it hard to believe that anyone would refer to Seattle as a bargain maket. I have four clients currently who have the ability to go full income documentation and can’t find any deals near there work place within there price range. If we considerd a $450,000.00 fixer a bargain then so be it.
    Investors looking for bargains or owner occupied purchases looking for a deal i don’t see it.
    In fact all the deals I see where over priced when the property was intially put on the market.

  6. What criteria should a prospective buyer use to tell if it is a good, or bad, time to buy in a given market? Should they look at the rent vs ownership cost rations? Affordability indexes? Median incomes? Job growth stats?

    Yes, Seattle has good job growth, but wouldn’t places like Detroit be great places to buy precisely because they are depressed already?

    Has there ever been a “bad” time to buy in the Seattle area?

    If there is never a “bad” time to buy, then it is hard to imagine how there could be a “good” time.

  7. Harold,

    That’s called January and February. Same thing happens every year in January. In fact it’s often the best time to get more than your property is worth if you are a seller, before more competition comes on the scene. Someone needs to buy now, and can’t wait for somethng “better”. So the odds of selling at all are less, but if you are the lucky one that sells for more than it’s worth…

  8. Sniglet,

    Depends what you want.

    If you want a great house, often the best time to get a great house is April 1 through June 30 in any year, based on the real estate cycle. You’ll pay top dollar, but if you are looking for a great home to raise your family with good schools to live in until they graduate from college, then that’s the best time.

    If you are buying a property for investment or looking for a bargain, historically the time is 10/15 through 12/31 of any given year.

    There is a cycle to real estate. Most people want a good place to live, and investment considerations are secondary.

    So do you mean for an investor? Or for a homeowner?

  9. If it helps answer the question about when to buy down, we can assume we are talking about an investor. Was there ever a year, or two, when it was a bad time to buy an investment rental in Seattle? When were the best times?

  10. I think the decision includes all those variables and more depending on the reason for buying a house. homeowner, investor, divorce, marriage, increasing family size, etc?

    Purchasing a home is a choice to own your shelter instead of renting you shelter. The news media and the real estate industry like to report that homeowners are wealthier than renters. Generally, that is true and many many studies validate that statement. But, there is more to the studies that doesn’t get reported or mentioned. A home is a forced savings account. When all the cash flows, tax treatment, opportunity costs, etc. are taken into consideration and discounted at an appropriate hurdle rate a disciplined life long renter can be just as well off or better than a homeowner. Generally, homeownership is a poor investment over a long time frame compared to alternative investments. Many assets can provide superior returns.

    Timing, affordability, job growth have an impact on home supply and demand….and on rental unit supply and demand.

    Timing is important in short term for real estate just as it is for investing in other assets classes. The old business school joke is how to make money in the stock market? Be in the market on the one best day and out on the one worst day. Good luck timing the market. As the hold time of the investment asset lengthens, market volatility and timing risk decreases. A few select parts of FL experienced capital asset growth or appreciation of 500 percent over five years. That amounts to an IRR of 37 percent not including leverage. Last year the market dumped 30 percent and everyone thinks the sky is falling. The sky is falling for those who entered the game at the end. The person who bought six years ago has an unleveraged IRR of 23 percent for the six years. Not too bad.

    Is there a good time to buy or a bad time to buy? There will always be a worse time and a better time. Predicting peaks and valleys in the market is not easy.

    Michael P. Lindekugel
    Financial Analyst
    RE/MAX Commercial
    Team Reba – RE/MAX Metro Realty, Inc

  11. Michael,

    I’ve never seen good cap rates on the West Coast, here or in CA. When was the last time someone could buy property here in the Seattle area and have cash flow?

  12. “Good”, of course, is relative. Cash flowing property is available, but you may not like the terms or the yield.

    Our capitalization rates tend be slightly better than CA. the amount of the down payment is somewhat dependent on the type of property and financing. I have seen small 2-4 unit multifamily properties financed at 80% LTV. They hemorrhage negative cash flow and will continue to do so. A larger down payment could solve that problem and is somewhat an investor decision. Multifamily 5+ units require commercial financing. A commercial loan amount is based on the lesser of a LTV or DCR (Debt Coverage Ratio). In a low capitalization rate market, a 1.2 DCR may result in a required LTV of 50-60%. A DCR of 1.2 means that the annual NOI (Net Operating Income) must cover the annual principal and interest 1.2 times. As a result, the commercial property is cash flowing, but at what cost?

    Is the 45% down payment worth it? The dollar amount of the additional 25% down payment may add up to more than the cumulative negative cash flow. Now, what? The discounted cash flow analysis to calculate the yield is a little more complicated. The yield is comprised of almost entirely of capital growth and little if any cash flow from rental operations. The capital growth isn’t realized until the asset is sold which is forecasted in the future adding additional risk and opportunity cost.

    How many small or new investors can perform discounted cash flow analysis on a fourplex or a duplex? Not many. How many real estate professionals can perform discounted cash flow analysis on a fourplex or a duplex? Somebody needs to do the math. Without calculating the after tax yield of a proposed real estate investment how does the investor know real estate is better than buying GE stock? Subway franchise? Bonds? This question is similar to evaluating several loan programs. The particular cash flow amounts and timing and terms of the loan programs will be different and difficult for many people to understand. The loan APR or effective interest rate calculates the discount rate of all the loans cash flows.

    Capitalization rates are an indicator of a property’s ability to generate NOI for the purchase price compared to similar properties. Capitalization rates are not the same as yield or ROI because it fails to account for all cash flows and tax treatment components. Since capitalization rates do not take into the time value of money they are only good for the first year. Typically, the capitalization rate will be calculated on actual financial information and pro forma. The pro forma financial information may reflect higher market rent and lower operating costs for an ill managed building or significant and material changes in the market.

    Much of the institutional investment is based on our thin rental supply market, historically low vacancy rate, historically high rents, etc that may provide increased future profitability. We won’t have any significant supply added to the rental market for years.

    I think you should invest in your own backyard. Seattle is a great place to invest. Invetors need to know what they doing. “Is this duplex pretty?” or buying a duplex because your brother in law did are not the right reasons.

    Michael P. Lindekugel
    Financial Analyst
    RE/MAX Commercial
    Team Reba – RE/MAX Metro Realty, Inc

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