How Do We Find Our Properties?

In a competitive market we can't often rely on finding good listings on the MLS.  Sellers these days have unrealistic expectations and there are too many buyers willing to overpay for a property that will haunt them like a burrito eaten after midnight.  

So how do we find properties where there is value to be had?

Direct Mail

You: Really?  

Me: Yeah, really.

You: But I always throw junk mail away.

Me: Have you ever gotten one of those Bed, Bath and Beyond coupons right when you were thinking that you really need a new non-stick egg poacher, so you go out and use that coupon? 

You: Yes. That was very specific, but yes.

Me: Bingo. It's all about timing, right place right time.  We typically send out 500 pieces of mail multiple times to yield that one time where our letter lands in someone's mailbox just as they were thinking, "I really got to sell that building. Man, it's going to be such a pain in the ass though.  I wish I could find a buyer right away."  

It takes time and money, but that is a property where we are not fending off multiple other bidders and thus the marketing more than pays for itself.

Referrals

As I mentioned in an earlier post, we are looking for people who are affected by life events or other factors that might make them motivated to sell quickly.  One channel we have found that has been useful is referrals from contractors who handle foundations, roofers, and plumbers.  

The last thing any building owner wants is to be hit with a large capital expense.  If you are already barely holding onto a property, a $30,000 bill for a new roof is a pretty spicy meatball.  We find out about these properties through our contacts and then reach out and offer to buy the place.  For the owners, it's a quick out for them instead of trying to come up with the money.  For us, it's a good way to buy at a discount and off-market.

Drive By's

When I slowly creep past your place, staring intently out the side window, pull to a stop and reach to the passenger seat; don't worry- I simply noticed that you're place is completely falling apart and I'm writing down your address so I can make you an offer when I get home.  

It's old school, but there is no better way to learn neighborhoods and find run down units in otherwise decent areas that can be turned around to offer solid cash flow.   

What Do We Look For in a Seller?

In 2006, Ryan and I, owned a condo in Beverly Hills Adjacent. It's a neighborhood in L.A. that didn't have enough personality on its own, so it just basked in the reflective glory of the neighborhood right next to it. 

At the time we both had jobs that would not afford us the ability to buy a cup of coffee in the neighboring neighborhood and yet...somehow we had no problem getting a $400,000 mortgage.  We knew others like us who had bought places they couldn't afford on adjustable rate mortgages and that this trend couldn't sustain itself.  I'm not saying we knew enough to short the market, but by spring we did know we wanted out ASAP. 

After meeting a few agents who couldn't find their butt if it was stapled to their hand, we met with someone who would serve as a mentor to us both, Paul.  Paul told us that based off the neighborhood's proximity to Beverly Hills and it's large Jewish population, our ideal buyer would either be someone in 90210 going through a divorce and needed a place right away or someone who had to be able to walk to the nearby synagogue on Saturdays.  Within a week Paul hit the daily double and found a rabbi who was splitting up with his wife.  

What we learned from that is whether buying or selling, it's to your advantage to find people who are either going through life events or constrained by existing factors.  It's guided us in our approach to finding our properties.  We look almost exclusively for off-market properties or sellers who are highly motivated.  Give me a Danny Glover landlord who is too old for this stuff, but too lazy to list any day of the week vs. the hot property with multiple bidders.

Not surprisingly this has become more difficult in this currently overheated market, but as Wayne Gretzky famously once said, "I never made a field goal, without getting the bat off my shoulder."

We have found that by spending the time to write more offers and dig deeper to find sellers who need to move their place we are still able to find value for our investors.  If Paul taught us anything, it is even in a tough market you can still find a rabbi divorcee. 

Why Real Estate?

The year was 2000, I was fresh out of college and, like most people my age, I took a job at a dot com.  At the time I was living at home and had a bit of extra folding money so I decided to put it in the stock market rather than waste it on frivolous things a 22-year old might... In hindsight, I should've blown it on Von Dutch trucker hats and a sweet leather duster jacket. 

In 2008, same story, different year.  I had my coin in the stock market, only to take another decent sized hit.  Again, I could've used that money to trick out my MySpace profile and bought a leather duster jacket to boot.  So it goes.

After two recessions in under a decade, I wanted more control with more stable returns.  In 2010, I found an answer.  My good friend from college, Ryan, moved to Albuquerque, New Mexico.  A city made famous from Bugs Bunny's repeated mistake of not making a left when hitting the town.  In college, Ryan was a janitor who would secretly solve math problems on the chalk board at night...I might be mis-remembering things, but he was wicked smart.  Ryan had started to pick up small multi-family buildings from the still smoldering wreckage of the Great Recession.  Albuquerque represented a great market for this.  The three largest employers are public institutions (Kirtland Air Force Base, University of New Mexico, and Albuquerque Public Schools) who aren't going anywhere, there is a large renter class, and since it was not a 'hot' market, like Denver or Portland, there was significantly less competition which presented great buying opportunities.  Even though he was not looking at a market with significant appreciation, he was compensated with higher cash flow (cap rates of 7-8% vs. 4%-5% of Denver/Portland).   It didn't take long before I partnered up with Ryan to help grow the business.  

We've both found real estate offers both us and our investors a better way to put our money to work and to do so in way were we have more control over our destiny.   Now, God willing, I'll finally get that leather duster jacket.

What Does 2017 Have in Store for the Housing Market?

Before starting this blog, I read somewhere that the two keys to a good blog post are asking a question in the title and make predictions.  It seems like a cheap gimmick, yet here we are.    

Before Looking Forward, Let's Look Back

Average U.S. home prices rose 5.6% in 2016, with much of the appreciation continuing to take place at the high end of the market. Since 2000, homes in zip codes where the median value is in the $500,000 to $1 million range are up 103%; but in regions where homes are in the $100,000-150,000 range, that period’s appreciation is only 24%.

The End of the Empty Nest

One reason that some observers believe that the market is not yet peaking is that homeownership rates remain historically low, especially among young people.  Despite a rebounding economy and recent job growth, almost 40% of persons between the ages of 18 and 34 are doubling up with parents or other family members, the largest percentage since 1940.                                

Rising rents and difficult mortgage-lending standards in the post housing bubble crisis are considered two of the culprits, while others have pointed to behavioral shifts among the younger generation who aren't interested in being tied down.  In addition to low home ownership, they are more likely to change jobs, wait later to start a family, and are buying fewer cars. 

What Does this Mean?

As someone who thought Donald Trump would lose in a landslide and declared the Patriots where done somewhere in the 3rd quarter of the Super Bowl, I realize I should be careful about prognosticating.  However, from my research I feel that the rental market will continue to be steady as home ownership will be out of reach for many for the reasons mentioned above (tight credit standards, flat wage growth, low interest among millenials). 

In terms of home prices, I feel we are in the 7th inning of the current housing cycle.  There might be a few more good years, but at some point we are bound for a down turn. From our personal experience, we've seen unrealistic expectations from many sellers, which lead us to believe even more in the importance of our approach of buying off-market from motivated sellers who own under performing properties.