You Could Buy A Loser Just As Easily As A Winner
-by the Mysterious Flying Miser
OK guys, a while back I let you have an interview from a real-estate investor in California named Bruce Norris. You all weren’t exactly very nice to the guy, so I decided to give you another chance because I know you can do it. I interviewed an old-time HBB reader and real-estate analyst, Jack McCabe, to find out what he thinks about buying and investing in Florida and other US markets. I asked him exactly 10 questions, to be neat and tidy, so I hope you appreciate it.
1. Describe what your company does.
McCabe Research and Consulting specializes in real estate research, analysis, and consulting. I also perform expert witness testimony for high-level RE litigation cases.
2. Can you provide some examples of the litigation you’ve been involved in?
I have been involved in cases that run the gamut of real estate squabbles. From eminent domain cases; to a case where three developers were working together, and one of them sold a bunch of units at increased prices, pocketed the money, and ran off without developing the units as promised; to a developer suing its attorney after 100% of its potential buyers rescinded their offers; to a case where a mom is suing the trustees of her daughter’s inheritance because they sold the property without converting it to condos first.
Essentially, the love-fest is over and the finger-pointing has begun. Studies and services for litigation cases have become growing revenue streams for our business.
3. Do you focus on a particular sector of the market?
Our firm is best known for multifamily research, including research on condos, townhomes, condo conversions, hotels, condo-hotels, and resorts. Although we focus on this market, I also have an extensive personal background in sales and project management for national single-family home builders. Initially, the firm concentrated mainly on Florida real estate, but we have extended our research coverage to all bubble markets, including Las Vegas, Phoenix, San Diego, the Inland Empire, Orange County, Sacramento, Bakersfield, and Stockton. We’ve also recently added the condo markets in Chicago, New York, and Austin.
4. Describe your typical client.
Our client base has changed and evolved with the correction cycle.
During the boom years (from 2001 to 2005), our clients were mainly apartment management/ownership companies, condo conversion companies, condo and condo-hotel developers, appraisers, and commercial real estate lenders. These clients were heavily involved in all facets of new construction. Our products at the time were “off the shelf” multifamily data reports and market feasability studies.
Today, we really do not have a typical client so to speak. Our clientele is very diverse. We work with high net-worth individuals, developers, lenders, private equity firms, hedge funds, and attorneys. Except for the attorneys, these clients are often opportunistic buyers looking to acquire REOs or mortgage notes on distressed properties at highly discounted prices from 2006 peak levels.
I also am engaged as a speaker/commentator by a variety of associations, colleges, and private firms. This fall, my audiences will include members of the Appraisal Institute; attendees at a national real-estate-publication-sponsored distressed-property seminar; and international investors who subscribe to an investment publication out of Baltimore.
5. Describe what’s going on in your focal market right now.
Florida is the epicenter of the housing depression and national/global recession. The overconstruction of condominiums and single-family homes, the ridiculous amount of apartment-to-condominium conversions, rampant and runaway speculative buying (which artificially doubled real demand during the boom), and the high percentage of toxic ARMs peaked first in Florida. While many of the toxic-loan lenders were headquartered in California, the mortgages and resultant foreclosures have destroyed Florida markets.
Florida has a long way to go before the pipeline of foreclosures begins to decline. Foreclosures will fuel the inventory pools in this state for the next 18-24 months, and the biggest wave of foreclosures still lies ahead. Three years ago, Florida unemployment was 4.3%; today, it’s 10.6%. I expect to see it rise to over 12% sometime in 2010. On top of that, the state actually lost population between June 2008 and June 2009, the first recorded population loss for Florida since WWII. All this does not bode well for local real estate through at least the end of 2010.
That said, there are some deals, although one must do excellent homework and be very sophisticated to take advantage of them. I don’t think you absolutely have to know someone at the bank to get a good deal. Of course it helps if you know someone who works at a bank’s strategic-assets group, but if you go to the courthouse steps in many Florida counties, you will find thousands and thousands of foreclosure sales every month.
One interesting phenomenon I see occurring during foreclosure sales is the formation of cliques. People will form groups, and then purposefully outbid others or overbid to prevent their competition (with competing strategic interests) from getting what they want. Sometimes they will cooperate and agree not to bid on each other’s pet properties. For this reason, it may be better to endure the frustration of short sales, where bidding competition is not normally a factor.
Another recent development is the upsurge in auction sales held by lenders. Units can go at these auctions for as little as 20% of boom-time highs. Other investors are pooling their money in groups to acquire bulks of units.
6. What is your favorite data source? Why?
I spend countless hours every day reading. I read all Florida newspapers, the Wall Street Journal, the New York Times, the Chicago Tribune, the Orange County Register, The San Diego Union-Tribune, and real estate, banking, and economic articles of US and international websites. We also purchase data from various information providers (such as Global Insight, Claritas, etc), as well as performing our own extensive research in the Florida markets.
I have also garnered a wealth of information from the Housing Bubble Blog, clicking on Ben’s links and picking out pearls of wisdom from the comments section. It was entirely helpful because everything was in one place where you could see it. I found a lot of insider knowledge among the various informed and uninformed opinions, as the anonymity of the internet allowed people to speak more freely than they might have otherwise. I also highly valued the neighborhood-level information.
7. What is your least favorite data source? Why?
I have a love/hate relationship with the National Association of Realtors (NAR) and the Florida Association of Realtors (FAR). Their analysis and text press releases throughout this cycle have been 180 degrees different from what their datasheets reveal. The sales, pricing, and percentage-change data are useful, but you can’t count on the press releases, which are finely spun propaganda pieces at best. Also, some of the main-stream newspapers have tended to be much more positive, sun-shiny, and glass-more-than-half-full than what was justified by reality.
8. Do you use a different decision-making process when considering a multifamily property than when considering a single-family property?
Yes. Single-family houses don’t get as much overconstruction during boom cycles because, when competition for land is fierce, it’s much easier to build a 40-story tower on ½ acre than it is to build an entire subdivision. Hence, single-family houses will rebound more quickly than multifamily. If an investor can buy a house and rent it to cover expenses, then that investor is in a good position. When purchasing a condo as an investment, however, one must anticipate more dramatic changes in value during boom/bust cycles.
9. Do you think that now is a good time for investors to start buying properties? Why or why not?
I think now is a good time for everyone to start doing homework. Study your target market(s), the submarkets, neighborhood, project or dwelling, and all potential data sources. If you have your eye on a particular multifamily building, find out how many units are vacant, how many are in foreclosure, what percentage of owners are not paying their HOA dues, etc. There are plenty of landmines out there, but there are some deals that make sense. I warn investors never to buy an investment property, condo or otherwise, unless it will immediately and consistently generate positive cash flow.
If you see what looks like an excellent opportunity to purchase a lot, several, or a chunk of land, again, do your homework or consult with an expert before moving forward.
You don’t need to pull the trigger within the next few months. This downturn and depressed prices will continue in many markets for at least the next 18 months. Real estate is a long-term investment, so don’t plan on buying and flipping in a year or two. The days are over when properties rose in value by double-digit percentages for years to come, unless you buy smart. Today, you must use extreme caution and be very sophisticated. You could buy a loser just as easily as a winner.
10. Do you think that now is a good time for owner-occupants to start buying properties? Why or why not?
If you are a potential owner-occupier with a plan to stay in the house at least 5 years, then, in the lower price ranges, now can be a good time to buy in some areas and markets. For first-time homeowners, this is made possible through the $8,000 tax credit (which I expect will be increased and extended), and additional tax advantages. However, there is still the potential for decline in values (10% over the next year, flat for a couple years after that). I advise prudence, a minimum down payment of 10-20%, and a conservative fixed-rate mortgage with PITI payments less than 28% of your household gross monthly income. In 5 years, it might be worth more than what you paid. Then again, maybe not. It will depend on the area and the deal you negotiate. Your priority should not be investment value, but rather how the house suits your needs.
As far as Florida goes, the light at the end of the long, dark tunnel is visible, but still a pinhole. Florida will always have sunshine, warm weather, beautiful beaches, and turquoise ocean waters. When population growth increases again in future years, real estate in the Sunshine State will again become a worthwhile investment. The long-term prospects for the market are still excellent, once this historic, decade-long rocket ride/crash to earth debacle is finally over and sanity again returns to real estate and financing.
