Investor Dilemma:
When to sell?
As home prices rise, real estate investors who purchased property since 2009 will begin to see appreciation in their rental property. The question remains for the investor, when do you decide to sell?
For the value investor, you have to look strictly at what the home will earn in rental income minus all expenses. If we take a Carlsbad home selling for $500,000 in 2010 with a 4.2 percent mortgage on $375,000 (25 percent down), and estimated rents of $2,600 a month, the investor is taking home around 7 percent on the money he put down.
If rents stay the same (which they have been steadily increasing), the property would need to increase in value to nearly $700,000 in order to reach a less-than-favorable return on the equity portion of his investment. That is nearly a 40 percent increase in price. This would be a near break-even scenario that should cause the investor to rethink the time and effort spent managing a property for a lower return. Although this is a highly simplistic example, that does not account for a variety of factors (mortgage deductions, repair costs, rise in rents, etc), it may help to illustrate the fact that higher home prices are needed for investors to consider selling their rental property.
With fewer new construction projects, investors (of all size) will be the answer to the market's real estate supply challenge.
Fewer foreclosures says Bank of America
Bank of America hosted an invite-only meeting for North County real estate professionals to discuss the distressed housing market at the Carlsbad By The Sea resort on Feb. 19. 'Distressed housing' is an industry term that is used to describe a property in which the homeowner is currently not making their scheduled loan payments and who are in some part of the foreclosure process.
Allen Seelenbinder, Senior Vice President of Asset Management and Portfolio Retention, is the public face for Bank of America's distressed housing division and led the discussion on the near-term future of the San Diego foreclosure market. The nation's second largest bank has been the major player in San Diego foreclosures since buying Countrywide in 2008.
Bank of America has utilized 'partner agents' to help sell thousands of their foreclosed homes throughout San Diego county over the past five years. But the assignments have recently dried up and these agents gathered for insight into how long the foreclosure famine will last.
For years, there has been talk of shadow inventory and undisclosed caches of foreclosed homes held by the nation's largest banks that will eventually make their way onto the market. But it looks as though these properties will not come to the open market soon.
Seelenbinder outlined Bank of America's aggressive moves over the past 18 to 24 months to unload non-performing assets to third party servicers and investor groups. BofA has been bulk selling bundles of properties to wealthy investors or hedge funds at discounted prices. A bank is prohibited from self-dealing and is unable to rent-out or hold property they take back via foreclosure.
But they are able to sell the homes quickly in bulk. Although bulk sales make up a smaller portion of the overall asset disposition, investors big and small can take partial credit for the reversal of the falling real estate market.
The Wall Street Journal recently ran an article that discussed the trend of foreign investors capitalizing on lower prices and currencies that are currently stronger than the dollar to buy residential investment property in the United State. Buyers from China, Canada and Australia are coming to the United States with the intent to buy investment property.
Today's real estate has been one of the few asset classes able to achieve above market yields of 8 percent or better. And whether it's in bulk, at the courthouse steps via foreclosure or a traditional purchase through agents, investors are in part to blame (or to thank, depending on who you are talking to) for the inventory shortage.
First-time homebuyers are feeling the pressure, as they are finding it increasingly difficult to compete with an "as-is", cash, no contingencies offer of an investor. Carlsbad has an average one month (or less depending on the month) of 'active' single family home inventory. This is a historically low number, that has helped Carlsbad's average market time to sell a single family home to move from more than 60 days to 26 days. And it is also helping to prop up housing prices.
Although still early in the year and difficult to forecast final numbers, local experts estimate average Carlsbad home price to increase between 4 percent and 10 percent in 2013.
But as homes values rise, a new challenge will develop for the investors with a short-term, speculative position: when do you cash out? Higher home prices and/or the inevitability of higher average mortgage rates will change affordability for traditional home buyers and the attractiveness of the investment. (see side bar).
According to Seelenbinder, the market for foreclosure homes and short-sales will continue to dwindle in the next 12 to 18 months. With prices heading back to 2002-2003 levels, many homeowners under-water or on adjustable rate mortgages will be able to refinance into lower rates and stay in their homes. And until new construction gets underway supply will remain restricted, as major property investors will not be looking to exit real estate soon.
When to sell?
As home prices rise, real estate investors who purchased property since 2009 will begin to see appreciation in their rental property. The question remains for the investor, when do you decide to sell?
For the value investor, you have to look strictly at what the home will earn in rental income minus all expenses. If we take a Carlsbad home selling for $500,000 in 2010 with a 4.2 percent mortgage on $375,000 (25 percent down), and estimated rents of $2,600 a month, the investor is taking home around 7 percent on the money he put down.
If rents stay the same (which they have been steadily increasing), the property would need to increase in value to nearly $700,000 in order to reach a less-than-favorable return on the equity portion of his investment. That is nearly a 40 percent increase in price. This would be a near break-even scenario that should cause the investor to rethink the time and effort spent managing a property for a lower return. Although this is a highly simplistic example, that does not account for a variety of factors (mortgage deductions, repair costs, rise in rents, etc), it may help to illustrate the fact that higher home prices are needed for investors to consider selling their rental property.
With fewer new construction projects, investors (of all size) will be the answer to the market's real estate supply challenge.
Fewer foreclosures says Bank of America
Bank of America hosted an invite-only meeting for North County real estate professionals to discuss the distressed housing market at the Carlsbad By The Sea resort on Feb. 19. 'Distressed housing' is an industry term that is used to describe a property in which the homeowner is currently not making their scheduled loan payments and who are in some part of the foreclosure process.
Allen Seelenbinder, Senior Vice President of Asset Management and Portfolio Retention, is the public face for Bank of America's distressed housing division and led the discussion on the near-term future of the San Diego foreclosure market. The nation's second largest bank has been the major player in San Diego foreclosures since buying Countrywide in 2008.
Bank of America has utilized 'partner agents' to help sell thousands of their foreclosed homes throughout San Diego county over the past five years. But the assignments have recently dried up and these agents gathered for insight into how long the foreclosure famine will last.
For years, there has been talk of shadow inventory and undisclosed caches of foreclosed homes held by the nation's largest banks that will eventually make their way onto the market. But it looks as though these properties will not come to the open market soon.
Seelenbinder outlined Bank of America's aggressive moves over the past 18 to 24 months to unload non-performing assets to third party servicers and investor groups. BofA has been bulk selling bundles of properties to wealthy investors or hedge funds at discounted prices. A bank is prohibited from self-dealing and is unable to rent-out or hold property they take back via foreclosure.
But they are able to sell the homes quickly in bulk. Although bulk sales make up a smaller portion of the overall asset disposition, investors big and small can take partial credit for the reversal of the falling real estate market.
The Wall Street Journal recently ran an article that discussed the trend of foreign investors capitalizing on lower prices and currencies that are currently stronger than the dollar to buy residential investment property in the United State. Buyers from China, Canada and Australia are coming to the United States with the intent to buy investment property.
Today's real estate has been one of the few asset classes able to achieve above market yields of 8 percent or better. And whether it's in bulk, at the courthouse steps via foreclosure or a traditional purchase through agents, investors are in part to blame (or to thank, depending on who you are talking to) for the inventory shortage.
First-time homebuyers are feeling the pressure, as they are finding it increasingly difficult to compete with an "as-is", cash, no contingencies offer of an investor. Carlsbad has an average one month (or less depending on the month) of 'active' single family home inventory. This is a historically low number, that has helped Carlsbad's average market time to sell a single family home to move from more than 60 days to 26 days. And it is also helping to prop up housing prices.
Although still early in the year and difficult to forecast final numbers, local experts estimate average Carlsbad home price to increase between 4 percent and 10 percent in 2013.
But as homes values rise, a new challenge will develop for the investors with a short-term, speculative position: when do you cash out? Higher home prices and/or the inevitability of higher average mortgage rates will change affordability for traditional home buyers and the attractiveness of the investment. (see side bar).
According to Seelenbinder, the market for foreclosure homes and short-sales will continue to dwindle in the next 12 to 18 months. With prices heading back to 2002-2003 levels, many homeowners under-water or on adjustable rate mortgages will be able to refinance into lower rates and stay in their homes. And until new construction gets underway supply will remain restricted, as major property investors will not be looking to exit real estate soon.