So Cal Real Estate News

The old country veteran looked me in the eye.  “It’s like wrestlin’ a bear, Dave!”

“You either give it your all, and keep wrestlin’ him ’til you finally got him down on the ground & whopped,” he continued,

“Or you just give up and die!”

With those words, spoken to me just a few hours ago in the living room of our model unit deep in the green hills of McMinnville, Tennessee, we resume our adventures in out of state investing (see “What I learned about investing out of state” for the first installment).

Hmmm, I thought to myself.  He sure didn’t use that analogy two and a half years ago when he sold me those two apartment complexes.

About two weeks ago I sent “Brother James” and his associate an e-mail exploring the possibility of disposing of the two rural Tennessee complexes Barb and I acquired two long years ago.  Tired of investing too much time and money trying to turn them around, I’ve begun exploring the option of unloading them sooner rather than later.

This afternoon, after pondering the numbers I sent him and then inspecting both properties, the investment Realtor and his partner were supposed to give me their conclusions about what sort of selling price I could expect.

Instead, it seemed to be turning into a lecture on fighting on in the gallant, life-and-death struggle to turn these properties around.

As a veteran agent myself, it’s always both interesting and educational to have the tables turned and be acting as the seller or buyer.

I’m still in the process of gathering data and evaluating how badly I really want to fight on or if I’m just ready to die, which may be better than the alternative in this case.   We have made a lot of progress, but we’ve still got a lot of “challenges” ahead (in real estate, we never have “problems,” only “challenges”).

At this point, if I had it to do over again, I wouldn’t.  But I think we’ve all had trials that helped us grow, and looking back later, we appreciate the process.  It’s had some fun moments, but they’d be a lot more fun if the cash was flowing in the opposite direction.

So I still say, keep your investments close to home.

And if you do venture far, resist the temptation to leverage yourself beyond what you’re already successful at.  In my case, I bought a complex in rural Tennessee that had three times as many units as our largest California complex, even though it cost less than half what that California complex was worth.  I should have started out with a smaller complex, and I should have at least stayed in a more urban setting at first, such as greater Nashville.

Buying several houses in Franklin might have been a smarter 1031 exchange, in hindsight, as my bar-wrasslin’ realtor suggested.

Or maybe just being content with what I had.  The pursuit of expansion for expansion’s sake does add a layer of complexity which may not be worth it.

I may add more thoughts to this post later.  But right now, I’ve got to go wrestle a bear.

Reporting from the front lines of the real estate battles here in Los Angeles and Orange Counties, we can now definitely say that sales activity and even prices are bouncing back from the record lows of November - January.
We think this provides local sellers with a window of opportunity, but it’s a window that will most likely be closing in a matter of months. . . or weeks.

Want evidence? We discussed our own increase in sales activity in our 2/29 Market Update post–3 listings sold in an average of about 8 days each. Then Blair noticed that our office “board” of new escrows was full for the first time in about a year, another major increase in activity. Then last night I ran into Ken, our termite expert from Coastline Termite, at the Anaheim Ducks game, and he reported a dramatic increase in sale inspections.

Trouble is, we experienced a similar bump last winter, but it petered out as interest rates went up in the spring. Then it fell apart as the subprime mortgage mess exploded, making it difficult to impossible to get a mortgage. Long term mortgage rates are rising again, as our elected officials try to borrow their way out of a recession, especially with an election breathing down their necks. And the “other shoe” of the subprime mess is dropping as I keyboard, with foreclosures only increasing their record pace.

Then there’s the annual cycle–busy spring, slow fall, prices dropping by winter. Put it all together, and it’s our opinion that sellers need to “make hay while the sun shines.” And it could stop shining sooner than you’d like. If you’d like more info, leave a comment or give us a call at 562.822.SOLD.

What about buyers? Prices, and even interest rates, could well be lower this coming December. In fact, the whole thing might fall apart in 2009, once the election’s behind us. But we wouldn’t be too surprised if prices continue to slowly move upwards, at least in the coastal plains of L.A. and Orange Counties. So, if you find a home that you really like, and you can afford with a 10 - 30 year fixed loan, and it’s in a good location, go ahead & buy it now. If not, keep saving up a down, paying down credit card debt, & looking around. If you want a direct portal to the Southern California Multiple Listing Service, just click on the link you prefer under “Multiple Listing Services” near the top of the right column.  We suggest you start with “Info & Tips on M.L.S. Searches.”

Finally, a word about timing. We’re talking about current activity–homes going into escrow. What the media usually reports is closed sales, which take place roughly 45 days after a home goes into escrow, then get reported in DataQuick’s confusing median price summaries about two weeks after the end of the month in which they close, which is about 60 - 90 days after they went into escrow. So the increases we’ve seen over the last few weeks won’t be reported until long after they close in April and late March.

Just mark your calendar–around 4/15 DataQuick (or “DataSlow,” as we prefer) will report a remarkable increase in sales for L.A. and Orange County homes, which will continue into the April closings they report mid May. You read it here first.

So, that’s today’s word from the front lines. We’d appreciate your thoughts & comments. Personally, we hope the Anaheim Ducks repeat last year’s spring performance, but the So Cal real estate market takes a more steady, less bumpy road this year. If not. . . there’s always baseball! Anybody up for a Freeway World Series?

Sunday’s New York Times had an interesting article on“How a Bubble Stayed Under the Radar,” dealing with economic theory and herd mentality.

Basically, it said what any long term observer of either the real estate or stock markets must have already concluded: Market prices get too high near the end of most up cycles, and too low at the end of most down cycles.

I figured that out at least three cycles ago, when another Realtor mentioned the insane bidding up of home values in 1989 was typical of the last, overpricing gasps of a market about to collapse. I thought our market had peaked in 2004, which was obviously too early. Still, in 2005 I made my ill-fated effort to beat the market by exchanging for out of state property (see my recent post on out of state investing). It’s the same herd mentality that created bubbles from internet stocks to silver.

Ironically, as our southern California prices drop, people tend to forget the flip side of the same herd mentality: The lows become irrational as well. Which either will at some point create or is currently creating opportunites to “buy low.”

I don’t think anybody can know with certainty if that time of opportunity is now or yet future. Once we know for certain, it will have past, and the best bargains will be gone.

But I do know that thousands of homes are on the market for prices 20% to 40% below the highs of a few years back. And I do know that many sellers are willing to take far less than they’re asking. And interest rates are also quite low.

I also know that prices tend to go up in the first half of the year and down in the second. So it appears that this year’s great opportunity may be passing. December of 2009 may present even greater opportunities. Or not.

But at some point, this market will overcorrect. Maybe it already has.

Dave here, with a sad, true story that might make you think twice before investing out of state.

Back in 2004 I decided that ten years was probably about it for our California real estate boom. (Turns out it should have been. Unfortunately, I was about two years early with that call–see “How we got into this mess.”) (For our current market forecast, see “A Change in Our Predictions?“)

Barb & I are buy & hold investors, but it seemed it might be time to liquidate at least one or two of our local rentals. To avoid capital gain taxes, we decided to use a 1031 Starker delayed exchange to purchase in an area where prices might be nearing a bottom. The ultimate in market timing–something I’d wished I’d done back in 1991, the last time our local market peaked.

After researching markets from Las Vegas to Florida I found a complex with upside potential in a small town with a fairly strong economy. As an added plus, we have family living fairly nearby.

So we sold a rental house in Lakewood, and bought 90 some units in 12 brick buildings in McMinnville, Tennessee. The 90+ units only cost two and a half times the house’s selling price. Sure looked like going from the top of the California market to the bottom of the rural Tennessee market to me. (Perhaps this whole experience has influenced my thoughts on market timing.)

Well, Barb & I have been spending time & losing money in Tennessee ever since. I knew it was a major turnaround project, but we’ve had great success with turnarounds before. But those were nearby in Southern California, not two time zones away.

I recently discussed my Tennessee challenges with David Haas, the best property manager I know in So Cal (or anywhere). He’s been following my saga for several years, offering helpful pointers along the way. This time he nailed it.

“You know, Dave, a number of my owners exchanged out of state over the last few years. It’s gone badly for every one of them.”

He went on to detail the particularly sad saga of one landlord who eventually lost his equity and his Texas apartments and then took a huge tax hit from the capital gains he’d deferred when he exchanged into it.

There are several reasons for this common woe, most of them obvious. Most experts agree your property should be close enough you can drive by it occasionally. What I didn’t realize is that letting locals know you live out of state is like walking around with a “Kick Me!” sign taped to your back. Or a bullseye on your wallet. And once a Californian opens his mouth in rural Tennessee, they know you “ain’t from aroun’ heah.”

I also had no idea how much looser disclosure and construction standards are in rural Tennessee. Our seller disclosure laws aren’t perfect here, but to me California looks like consumer heaven compared to Tennessee. And building codes in unincorporated areas? Non existent, as far as I can tell!

Eventually, I had to hire my Tennessee son-in-law to supervise the units. He’s not David Haas yet, but he’s learning, and he’s honest. He’s now got his own management firm, Sasser and Thrasher (I’m not making this up). They’re now also managing units for other out-of-state owners, most of whom were ripped off by their former managers. Like another Californian, who flew out to inspect the six new roofs he’d paid for, only to find they didn’t exist.

As for us, I hope we’re finally starting to turn a corner. The day may come when Barb & I are glad we own The Meadows Apartments. But the price to get there was way more than we expected. We did much better during the ‘91 - ‘95 recession, when we stayed close to home and exchanged from single family rentals to multi family units.

So, before you jump on something out of state think twice. And pray thrice. At least. If it’s an area you know, maybe one you intend to retire to or have family in, it might be worth considering. But I’d start by checking out foreclosures and motivated sellers throughout Southrn Califonra before going out of state.

The Inland Empire and desert regions are about as far from home as I’d recommend going. We do think eventually things will turn around here (see “What’s Next For Southern California Housing?“) We think some parts of the I.E. may eventually bounce back like South Orange County did from the last biggie back in the 90’s.

Southern California still has lots to offer that few, if any, other places on earth can match!

When it comes to going out of state, I now think of what my mom used to tell me: “The grass is always greener in the other fellow’s lawn!” Or so you think–until you own it!

April 25 update: For the latest installment in this ongoing adventure in out of state investing, check out my April 25 post from Tennessee.