Are we in a bubble?

Boston, Business, Investing, Wholesaling on August 31st, 2015 Comments Off on Are we in a bubble?

Bubbles floating

We here at AA Real Estate Group have been busy all summer preparing rehabbed properties for sale, closing on completed rehabs and wholesale deals, and prepping new rentals for tenants. And now that I’ve got those plates all spinning, I turned my attention to the pipeline of new deals, to discover it was…..almost empty. Seriously?!? What gives?
Between this discovery and the updates being posted by my colleague Shaun M. Reilly, what’s been bubbling up for me is that Sad bubbleMassachusetts real estate is currently in a bubble — there, I said it!

I can hear you now, “Wait, Nick — how can you say such a thing? Sales are strong, demand is high and prices are on the rise! Right?”  Well, let’s take a look.

The first red flag for me came from a recent WSJ article that addressed a practice that seems to be back in play that we haven’t seen since 2006 – SELLER-FUNDED DOWN PAYMENTS for buyers who can’t afford their down payments.  This, coupled with the return of stated income and NINA (no income, no assets) loans for borrowers… I don’t know about you, but I find this return to sub-prime lending disturbing.

And that safety measure the Feds created by requiring appraisal companies to be hired by third parties to reduce the likelihood they will be influenced to turn in artificially inflated appraisals?? Well, I have it on good authority from a number of friends in the appraisal industry, that not only are they completely swamped and backlogged, but when they do get to a property, they are being pressured by their bosses (who want to keep Bank X as a client) to turn in an appraisal within a certain target value.

So, let me get this straight — people are once again getting sub-prime loans on properties whose values are being artificially inflated? Yup, that’s right.

And finally, that brings me back to my pipeline. It would be easy to assume it’s because I have been super busy managing projects, and therefore less busy following up on leads, breaking into meth labs, or analyzing properties — and that’s not the case. In fact, I’ve been out to look at piles of properties and what I’m finding is the numbers just don’t work — the sellers are eager to cash in on a hot market and won’t negotiate a wholesale price that meets the AARE criteria for minimum profit, and you know what? There’s usually someone right behind me willing to pay the inflated price (with more money than brains!), and so far, they’re usually STILL making money, due to how property values and asking prices are rising so quickly with sellers competing for homes, but how long can that model be sustained?

Based on this article from boston.com, not for long — many communities have seen a sharp rise in properties with reduced sales prices (over 21% overall) and anywhere from 13 to 20 percent of deals are falling through before they close, based on an analysis of monthly pending sales numbers put out by the Massachusetts Association of Realtors. Zachary Christman, a Hammond Residential Real Estate broker working the Newton/Brookline market quoted in the article shares that buyers “are worried they are paying too much, there is all this stuff they have to do with the house—it just scares them. There is no doubt about it. The buyers, when they realize they are paying five or six figures over asking, it just makes everything else that much more scary.”

Up and down arrowsBreaking down the numbers, as a real estate redevelopment firm we used to strive to make 15-20% on a transaction, as a percentage of our resale price.  This was in the DOWN market when it was easier to find deals and bargains, but resale prices were lower.  Now, with the hot market, we’ve had to reduce our margins to the 10-15% range.  The scary part is — think about it — not if, but when the market begins its correction, and with only a 5% market swing — that HALVES our profit.  I don’t know about you, but I don’t want to be holding 10 projects at once when the prices start to fall!

What do you think? Are you seeing signs of a real estate market correction? Or have you seen any problem properties with issues? Be it divorce, estate sale, probate, fire damaged, failed septics, foundation issues, Medicaid, short sale, underwater, foreclosure, owe more than your home is worth, or you know you simply can’t make the repairs needed — gimme a call!  I pay wholesale and marketing fees!

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