US Auto industry bailout: The size and scope of the auto industry.

Whether or not you agree with the very notion of a bailout; one thing is for certain, most people don’t understand how large the US auto industry is.

This is a real estate website and not a political website, but I believe this video puts the facts of the real impact that will happen if we lose the “Big 3″ domestic automakers.  Losing another 3 million jobs will undoubtedly affect the real estate market.  It will have consequences in every town and city in this nation.

I just found this interesting and wanted to share it.

Should you buy an Austin 4-plex?

Should I buy an Austin 4-plex?

I often get calls from investors excited enter the Austin real estate market. Without fail, the first thing they want our team to show them is a fourplex (4-plex).

Why?

<place photo of typical fourplex here>

Their reasons are:

• To benefit from Economy of Scale ( 1 roof, yet 4 streams of income)
• To minimize the financial impact of vacancies, which would be defrayed by having other occupied units.
• To save on the front end of the transaction—By purchasing 4 units at one time, they avoid paying the fees associated with several loans and several closings.
• Buyers can feel like they’re moving up in the investment world. (Bigger is better, right?) They get the sense that they’re just a step away from owning a small apartment complex while still obtaining a standard 1-4 family residential loan. (True apartment loans require large down payments and are often more difficult to obtain.)
• The own a fourplex someplace else in the country which has performed well for them.

I am absolutely aware of the appeal of these properties, particularly to outsiders unfamiliar with the Austin market. The above points appear to make a well-reasoned argument—certainly it is one that might apply in other parts of the country. But, as a seasoned investor and an advisor to my own clients, I AM ABSOLUTELY NOT a fan of Austin 4-plexes.

There are many reasons for this.

A 4-plex is like an apartment complex with no amenities. It is at the bottom of the rental food-chain for tenants. In a house, tenants have the benefits of homeownership without the maintenance and insurance expenses. In an apartment, they have the security of a community and amenities like pools and gyms. Duplexes represent a step up from apartments for many tenants, providing a yard and fewer noisy neighbors.

But who wants to live in a fourplex? And why?

They are generally arranged in a 2 unit over 2 unit arrangement, like two shoeboxes on top of two other, identical shoeboxes. The bottom 2 units typically lease up fairly easily, but the top units can be difficult to move.

The first warning sign for buyers should be rents: The rents in fourplexes are lower than standard Austin rents for units of the same size. Fourplex rents average between 500.00 and 600.00 per month whereas the average rent in Austin for 1st Quarter 2008 was $907 a month. The tenants in a 500.00 to 600.00 range are very, very low income. They struggle financially and when the going gets tough the rent won’t be paid. Or the property might be abandoned altogether. I’ve seen this countless times.

A prominent local property manger gave a presentation at our office last week, reviewing statistics of different classes of property. He analyzed them by property type, area of town, and rent range. The statistic that knocked me off my chair was that the properties with rents of less than 600.00 a month had a 21% rate of uncollectable rent—meaning the rent is due and it cannot be collected. Yes, that is not a misprint: 21% uncollectable. This is due to evictions and “skip outs.”

This second graph compares this year’s prices with last year’s prices. As you can see, values have dropped in this area of the market. As the buyers become more educated about the Austin market, this trend, in my opinion, is not likely to improve.

Sounds expensive, right? But, wait, it gets even more expensive. That 21% loss does not account for court costs, vacancy, damages, and re-leasing expenses.

As a former owner of a property management company which managed 300 small residential units, I always recognized those units as problematic, but I never crunched the numbers like my associate. Seeing them in that format confirmed all of our worst suspicions about these properties.

FOUR REASONS NOT TO BUY AN AUSTIN FOURPLEX:

1. Purchasing an Austin fourplex means investing in a property which appeals only to tenants living very close to the poverty line. This tenant base has almost no financial security, a factor which (in our small sample, anyway) results in a 21% rate of uncollectable rent.

2. The upstairs units will be difficult to rent and will likely have extended rates of vacancy. Vacancy rates of 20% are not uncommon.

3. Many property managers refuse to manage fourplexes, so by purchasing one, you limit your options for finding a property manager you like.

4. Streets with multiple 4-plex units (and they are typically grouped) tend to look trashy and neglected. It’s not unusual to see garbage cans left out on the street all week, litter-covered lawns, and parking lots and yards filled with junk cars. These factors also work as deterrent to better-quality tenants, making it very difficult to ever elevate the status of a fourplex.

5. Constant turnover makes it difficult to keep units in top shape, which means added expenses for fix-up between occupants and increased maintenance calls from tenants during their occupancy.

Of course, there are a few Exceptions to the rule:

1. Fourplexes located in high-demand areas like in the immediate vicinity of the University of Texas or in established downtown neighborhoods can often be easily leased.

2. It can be much easier to lease fourplexes built townhouse-style—in a row with all front doors on the same level, as opposed to being stacked one on top of the other. Again, even fourplexes of this type should be located in a higher-demand area to attract quality tenants

3. Fourplexes which, for whatever reason, have established track records of attracting (and keeping) higher-quality, long term tenants while bringing in higher-than-standard rental income should be given a second look.

<Insert photo of a better fourplex>

What do you do if you currently own a problem 4-plex?

As with any bad investment, you have to cut your losses. My advice is to sell it. In my experience, that’s the only way to reduce your exposure and avoid throwing good money after bad. The investors in this market are not paying retail for this product. The entire market is only moving three 4-plex units a month. Currently there are 30 4-plex properties for sale in the Austin Metro Area. It would take the Austin Market 10 months to absorb the current inventory.

Travis County Tax Appraisals for 2008 have gone up 12.5%

That is good news for investors worried about the potential of declining values but bad news for taxpayers. 

 Austin real estate is appraised by the Travis County Aprraisal district by a flawed method of appraisal called the “mass appraisal method”.  This has a lot of twists and turns.  I once read a 30 paige pdf on it– It really put me to sleep.  I say a flawed method because texas is a privacy state.  The price that you paid for a property is not a matter of public record. 

When your deed is recorded the appraisal district will  politely send out a notice asking what you paid for the property.  When you recieve it— THROW IT AWAY.  Sometimes new proud homeowners report values to the appraisal district — that then get applied to all the properties within the same section code.  This is far different from a Comparitave Market Analysis  (CMA) that an Austin Realtor will give you.  A CMA takes into consideration the condition of the property, upgrades and other factors. 

If you do not agree with the appraised value– before you protest– call a realtor ( namely Dena Davis) and let me take a quick look at the value.  I will let you know if you have an adequate chance of winning a protest.  You will have to bring in comparables– that support your claim of value. 

One other thing to know.  Some if not all  appraisals that work for the district have real estate licenses.  One time– during a protest– I brought my comps pointing to the lower value and Karlton Sneed, an appraiser for the district sat on his computer and pulled comps that he saw from a higher value. 

So this privacy issue only goes so far.  I dont know if they are supposed to be doing that.  — I doubt it.  But it happens. 

We are always here to serve the Austin investment real estate community in any way we can.  If you are wondering whether or not a property is really worth the appraised value.  Call me 512-473-2444 ext. 2. 

 To read the entire statesman article http://www.statesman.com/business/content/business/stories/realestate/04/16/0416appraisals.html

 

 

 

 

 

Percentage of investor home purchases at 17% in 2005 and 2006

I have always wondered what percentage of single family homes were aquired by investors.  I just heard fed Chairman Ben Bernanke say in a news briefing today that in the 1990’s non-owner occupied home loans were 5% of the total home loans.  In 2005 and 2006 — that number was 17%. 

Bernanke is talking about that national picture.  I am not sure how that number translates to our Austin Market.  If anyone knows what that percentage is — Please chime in!  I would imagine that we are about 10% or less in non-owner occupied loans. 

The problem is that investor loans come with more risk.  Borrowers are less likely to default on thier primary residence.  But on an investment property they are more likely to default.  When home prices fall below the loan value—  investors are more likely to default. 

Austin average sales prices were up 6.62% in February 2007 over February 2006.  The average sold price per sq. ft was up 4%.  So I dont think we are going to see the same foreclosure issues that the California and Florida are experiencing.