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Erik

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Reply with quote  #1 

My sister in Denver bought a single family house in northwest Houston 18 months ago, rented it out and tried to sell, but her 1996 built house had a tough time competing with all the new building there.

 

There is an enormous amount of new supply regularly coming into the Houston market. There's also a strong bias against older houses.

 

The cash flow possibilities are quite good, if you can rent a property.

If a house costs 110k, why would a responsible family with reliable income rent instead of buy? My sister had a tough time finding such tenants.

 

She finally sold her property to a California investor.


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ISamson

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Reply with quote  #2 

Thanks for sharing the information.

 

Allow me to add a point of view that perhaps will keep some from getting themselves in the same position somewhere else at some other time.

 

The various  "problems"  that happened for this Investor need not have happened.

 

1  --  It is always the case that newer properties are more desirable than older  ( even if  1996  isn't that old ).  This is a universal Principle that could  ( and should )  have been factored in from the beginning.

 

2  --  The  "enormous"  amount of supply can be learned about by studying the Market Cycle,  thus one can use this information to either not buy at this time in this area or to adjust the Entrance and Exit strategies accordingly.

 

3  --  There are millions of Families renting when they could be buying,  for myriads of reasons,  and millions more that are just shy of being able to buy.  Therefore,  the actual part of the equation at issue here is the price and rent.

 

The price must be adjusted for such factors as age and amount of competition.

 

The rent must be adjusted for the current market atmosphere.

 

One point is that this situation is not really specific to Houston,  it is specific to diligence preparation.

 

Suggestion :

 

Have a clear Entrance and Exit Strategy in mind at the beginning of the Due Diligence phase.

 

This includes geting the real numbers  ( with additional factors added in )  and the real market atmosphere to gauge how one must buy to successfully profit in the manner desired.

 

This will allow one to solve the above problems  ( ahead of time )  so one need not have an unpleasant experience.

 

There are many other factors,  but that just adds to the credibility of the suggestion to study up a lot more than many will before taking the plunge.

 

As Ron says,  it's a lot cheaper to pay for your Education up front than learn it in the  "School of hard knocks".

 

 

 

 

 

 

----------------------------------------------------------------------

 

My sister in Denver bought a single family house in northwest Houston 18 months ago, rented it out and tried to sell, but her 1996 built house had a tough time competing with all the new building there.

 

There is an enormous amount of new supply regularly coming into the Houston market. There's also a strong bias against older houses.

 

The cash flow possibilities are quite good, if you can rent a property.

If a house costs 110k, why would a responsible family with reliable income rent instead of buy? My sister had a tough time finding such tenants.

 

She finally sold her property to a California investor.

Suzanne

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Reply with quote  #3 

To Samson,

 

Everyone is pushing Texas.  CA $$ is flowing into that State.  The original authors of this post sounds as if they did their h.w. They bought a property that could cashflow and didn't rent.  That is a risk of investing.  The post reads as if they did consider all the cost.  What else would you have done in terms of an exit strategy and in terms of getting into the deal.  What other h.w. would be required besides the true numbers? 

 

Just wanting to learn!

 

Suzanne

Erik

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Reply with quote  #4 
Quote:
Originally Posted by ISamson

Allow me to add a point of view that perhaps will keep some from getting themselves in the same position somewhere else at some other time.

 

The various  "problems"  that happened for this Investor need not have happened.

 

1  --  It is always the case that newer properties are more desirable than older  ( even if  1996  isn't that old ).  This is a universal Principle that could  ( and should )  have been factored in from the beginning.

 

2  --  The  "enormous"  amount of supply can be learned about by studying the Market Cycle,  thus one can use this information to either not buy at this time in this area or to adjust the Entrance and Exit strategies accordingly.

 

3  --  There are millions of Families renting when they could be buying,  for myriads of reasons,  and millions more that are just shy of being able to buy.  Therefore,  the actual part of the equation at issue here is the price and rent.

 

The price must be adjusted for such factors as age and amount of competition.

 

The rent must be adjusted for the current market atmosphere.

 

One point is that this situation is not really specific to Houston,  it is specific to diligence preparation.

 

Suggestion :

 

Have a clear Entrance and Exit Strategy in mind at the beginning of the Due Diligence phase.

 

This includes geting the real numbers  ( with additional factors added in )  and the real market atmosphere to gauge how one must buy to successfully profit in the manner desired.

 

This will allow one to solve the above problems  ( ahead of time )  so one need not have an unpleasant experience.

 

There are many other factors,  but that just adds to the credibility of the suggestion to study up a lot more than many will before taking the plunge.

 

As Ron says,  it's a lot cheaper to pay for your Education up front than learn it in the  "School of hard knocks".

 

_______________________________________________________________

 

 

Excellent post Samson.

 

I particularly like what you said about an exit strategy and doing one's homework to get the real numbers.

 

My sister was able to eventually rent the property out, but she didn't anticipate the vacancy period in her cash flow calculations and that in order to find a renter, she'd have to lower her rent price below the amount every other vacant property was advertising. A place is rentable at what the market is willing to pay, not what others are unsuccessfully trying to rent for nor what a seller or sellers agent claim.

 

I agree that buyers prefer newer houses. It does seem, however, from my sister's experience and other TX owners  I know, that newer houses are in even more favor in TX than elsewhere. This has to be anticipated-doing your homework and finding the right numbers.

 

Would you please expand on what you said about exit strategy? I take what you mean that one should always have a contingency plan. If a property doesn't rent or rent for an amount that gives adequate profit, what then? Lower the rent , sell, improve? If it doesn't sell, try a lease option or something creative?  If I buy a house with intent to rent it for anticipated cash flow and hold for the long term, what is my exit strategy? Is it what I'll do if the property turns out not to be a good rental?

 

 

 

 

 

 


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ISamson

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Reply with quote  #5 

Why did it sound like they did their homework ?

 

It appeared to me that they did not know what it would rent for or sell for,  hence the inability to do either expediently.

 

Besides the standard due diligence numbers that we all must do,  there is the additional factor of being very tuned in to the market cycle,  not only it's current atmosphere,  but which direction it's going,  and what stage of any changes one may be at currently.

 

All properties rent,  so the  "They bought a property that could cashflow and didn't rent"  has some flaws in it.  It didn't rent at what they wanted it to maybe,  but it did with what the true market would bare.

 

I am not sure what their Exit strategy was.  If we knew we could better gauge how to have avoided their challenges.  It sounds as if they bought a house with the intention of quickly reselling it for a profit.

 

Putting a tenant in there made it harder to sell,  for one thing,  but that's not a primary issue.

 

Most likely the biggest issue was the purchase price versus the selling price,  and the fact they were asking too high and thus no sale.

 

If they bought at the right price and asked the right resale price,  it would have sold quicker.

 

To address your final question of  "What other h.w. would be required besides the true numbers?",  I must say I don't believe they ever had them.

 

Besides getting them,  the only other factor is what I addressed above,  the Cycle atmosphere. 

 

Let me know if further clarification is desired  . . .

 

 

 

------------------------------------------------------------------

 

Everyone is pushing Texas.  CA $$ is flowing into that State.  The original authors of this post sounds as if they did their h.w. They bought a property that could cashflow and didn't rent.  That is a risk of investing.  The post reads as if they did consider all the cost.  What else would you have done in terms of an exit strategy and in terms of getting into the deal.  What other h.w. would be required besides the true numbers? 

 

ISamson

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Reply with quote  #6 

You are answering some of your own questions here,  so it will bode well for better preparation on the next one.

 

One point is that what things are being advertised for are not the market rents or prices !

 

That is why we check Sold versus Active listings  ( for prices )  and Market Surveys versus what they are being advertised for  ( for rents ).

 

What information do you have that leads you to believe that new versus old is more significant in Texas than anywhere else ?  I hardly think this could be true.

 

Yes,  age of structure is always one of the diligence considerations.

 

The main point about Exit Strategy is that you must have one clearly defined,  even if that allows for a wide variance in each Investor's plan,  and even if some Exit plans are to keep forever and leave to Children in Living Trust.

 

Each one has it's own requirements for the nature of a good purchase.

 

If you discover you are wrong in your Due Diligence,  such as your example,  then you may choose to change the Exit Strategy unless the hit you take is acceptable.

 

You can call these Contingency plans if you like.

 

The most important factor is to be very diligent  ( meaning thorough )  and conservative in your Buying numbers,  then there will be less surprises,  and the ones that still crop up won't hurt so bad.

 

Also,  Exit Strategies can be adjusted through time and circumstance if your life or goals change.

 

Since it appears that yours was to sell from the get go,  it needs to be clear and fixated on the short term issues.

 

Personally,  if I was to buy a property with the intent to immediately resell it  ( which appears to be your situation,  and hey,  that is what I do),  I would have left it vacant,  and the important numbers would have been purchase price to resale price.

 

Something like this :

 

Resale price minus purchase price minus purchase costs minus repairs minus holding costs minus resale costs minus hedge factor  =  net profit.

 

You have to be pretty certain of these numbers  ( or buy real cheap like Bruce Norris )  to pull it off without the surprises you experienced.

 

Let me know if further clarifications are needed  . . .

 

 

 

 

 

 

 

 

 

 

 

-----------------------------------------------------------------

 

My sister was able to eventually rent the property out, but she didn't anticipate the vacancy period in her cash flow calculations and that in order to find a renter, she'd have to lower her rent price below the amount every other vacant property was advertising. A place is rentable at what the market is willing to pay, not what others are unsuccessfully trying to rent for nor what a seller or sellers agent claim.

 

I agree that buyers prefer newer houses. It does seem, however, from my sister's experience and other TX owners  I know, that newer houses are in even more favor in TX than elsewhere. This has to be anticipated-doing your homework and finding the right numbers.

 

Would you please expand on what you said about exit strategy? I take what you mean that one should always have a contingency plan. If a property doesn't rent or rent for an amount that gives adequate profit, what then? Lower the rent , sell, improve? If it doesn't sell, try a lease option or something creative?  If I buy a house with intent to rent it for anticipated cash flow and hold for the long term, what is my exit strategy? Is it what I'll do if the property turns out not to be a good rental?

 

 

Suzanne

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Reply with quote  #7 

Samson, Erik, Great posts. Erik for putting out your issue and for Samson to ask the hard questions.

 

I have been avoiding investing out of state, particularly Texas because of the frenzied rush of California investors to all areas of the state.  It seems to me that it is very easy to go online, find a realtor, a house, a prop mgmt co and maybe even a renter. However,  I assumed that CA investors were checking very recent comps, insurance, taxes and checking the papers and wherever else to find out about market rents and to have a plan to be able to hold the property in the event it's not rented.  Okay, that is what I know and I know I need to learn more.  I wouldn't buy without knowing at least that. 

 

I have a question for Erik.  Was this property purchased after a trip to the community or was it purchased via phone, internet, etc...

 

Samson, isn't there a big risk buying property in a flat or declining market or "overhyped" market and getting caught in the decline?  I mean, in CA we were buying dirt in a corner and it appreciated like crazy.  You didn't have to have smarts.  Now, even with good comps and great knowledge about market rents, how do you do your "homework" and adjust for holding a property 6 months or so and you are caught in the decline?

 

Thanks

Suzanne

Suzanne

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Reply with quote  #8 

Also, the property was sold to a CA investor?  Perhaps it was unloaded on a newbie investor?  Not sure from the post but was the property passed on to another CA investor who did not do their h.w.?  Just someone jumping to "get into Texas" as everyone is excited about? 

 

I really want to invest out of state but am concerned about how eager and receptive out of state agents are when I say I'm from CA.  When I ask for market info, comps, info about truly local markets, appreciation rates, rates of foreclosures, population increase/decrease, etc... I get long pauses and a "I will get back with you on that" responses. 

 

How should I deal with that?

 

Thanks,

Suzanne

ISamson

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Reply with quote  #9 

Great questions.  Keep asking those and you'll go far  . . .

 

Now I cannot claim you can prepare for everything  ( although I sure try ),  and I have had at least one surprise in just about every deal  ( surprise being defined as a cost not anticipated ),  but I do propose that most situations I hear about could and should have been avoided by up front study and diligence.

 

To continue,  yes !  There is a risk in buying in a flat or depreciating market,  and we must have adjustments in our plans to account for those.

 

To make a long answer short,  you buy very cheap !  This is a skill that most investors do not possess for the reasons you mentioned,  they did not have to have them in the Appreciation leg. 

 

Well now they do.

 

To add a tip to the Principle,  most newbies I have Mentored  ( and I was guilty of this way back when )  put liberal numbers on things to make them  "pencil"  ( like the person who started this thread for example )  and then act surprised when things don't turn out that way.

 

A dose of Guru reality in educational courses will teach not to do this,  but each learns it their own way,  either from Gurus or from the proverbial school of hard knocks.

 

Regarding your second Post,  I had several of those thoughts myself.  Did this  "CA  Investor"  know what they were doing and buy it cheaper or as Ron says,  did the first Investor find a  "greater fool"  who will now have more problems ?

 

Those Realtors you refer to just want to make sales to make commissions to put food on their own tables.  The trick is to not allow them to ever give you an opinion,  "just the facts please".

 

Then with your own knowledge you direct them what to do for you.

 

To address your final comment,  Ron says you need to learn how to say  "Next !"  until you find the quality team member you seek.

 

Again,  most newbies I have Mentored will not do that either because they are so eager to put together some deals  ( and again,  I was guilty of this myself in the beginning ).

 

Keep on truckin'

 

Your Family and your Dreams are worth it !

 

 

 

 

 

   

 

Erik

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Reply with quote  #10 
Quote:
Originally Posted by Suzanne

Samson, Erik, Great posts. Erik for putting out your issue and for Samson to ask the hard questions.

 

I have been avoiding investing out of state, particularly Texas because of the frenzied rush of California investors to all areas of the state.  It seems to me that it is very easy to go online, find a realtor, a house, a prop mgmt co and maybe even a renter. However,  I assumed that CA investors were checking very recent comps, insurance, taxes and checking the papers and wherever else to find out about market rents and to have a plan to be able to hold the property in the event it's not rented.  Okay, that is what I know and I know I need to learn more.  I wouldn't buy without knowing at least that. 

 

I have a question for Erik.  Was this property purchased after a trip to the community or was it purchased via phone, internet, etc...

 

Samson, isn't there a big risk buying property in a flat or declining market or "overhyped" market and getting caught in the decline?  I mean, in CA we were buying dirt in a corner and it appreciated like crazy.  You didn't have to have smarts.  Now, even with good comps and great knowledge about market rents, how do you do your "homework" and adjust for holding a property 6 months or so and you are caught in the decline?

 

------------------------------------------------------------------

  have a question for Erik.  Was this property purchased after a trip to the community or was it purchased via phone, internet, etc...

 

-Answer...they  used the internet and phone to learn about the market and contact agents.  They flew to Texas twice, first to get an on the ground idea of the areas, meet with agents and narrow down possibilites, and again to actually buy. Much of the work went back and forth by fax I believe.

 

They sold to a CA investor who was buying multiple properties in Texas. I actually met the guy because I'm in CA while my sister is in Colorado. The guy seemed like he knew what he was doing and definitely isn't a "newbie".

Now I don't want to make it appear my sister regretted the investment. She did cash flow once she found a renter and she made a respectable profit on the sale. However, she didn't delve deeply enough into finding the REAL numbers, so her return wasn't as high as expected.

 

 

 

 

 


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ISamson

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Reply with quote  #11 

Hey,  if she still profited then not only was it a great learning experience but it can also be put in the  "win column"  too !

 

Now this California Investor,  just because he is experienced doesn't mean he knows what he is doing.

 

Now maybe he does,  I don't have all the facts.  But just as likely is that he will be getting a rude awakening with a lot of purchases near the top of markets.

 

If he has reserves to weather short term fluctuations then a long term plan will still work.

 

 

 

SoCalStan

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Reply with quote  #12 
Quote:
Originally Posted by Suzanne
I really want to invest out of state but am concerned about how eager and receptive out of state agents are when I say I'm from CA.  When I ask for market info, comps, info about truly local markets, appreciation rates, rates of foreclosures, population increase/decrease, etc... I get long pauses and a "I will get back with you on that" responses. 

 

How should I deal with that?

 

Thanks,

Suzanne

Great Question!  I found that a lot when dealing with Texas Realtors/Agents.  Some were Great, many were goons.  Not much in the middle of those extremes.  

 

I recently spent 4 days looking at a couple areas up north.  How did I prepare? One of My Favorite ways is to look in the SuperMarket Real Estate Magazines, to get a idea of the area prices.  Nickle Ads/Penny Savers too.  Newspapers?  I find that many if not most ads are Agent ads. Check Online ads & Comps too.  Zillow? sometimes.  Google Earth? YEP!

I also looked at Population stats for the past several years, as well as appreciation figures.  Demographics too. 

 

Once there, I spoke with a couple Investors in the Areas, and I spoke with 5 Realtors in 3 different offices.  I liked 2 of them, fortunately in different towns.  I spoke with business People, and talked with some County Housing People. I like to talk with the area Police, because they KNOW wazzzzup!  I took a TON of Photos, and I also spoke with people that had just move into the area, as well as people who came in a couple years ago.  Surprise!  5/6th were Calififornians - 2 times the house for 1/4 to 1/2 the price.   

 

Did I like it?  I did, and based on historic Trends, I'd say it has about 2 more years of Solid Growth.  Not a ton of appreciation, but there should be more than Texas will throw off.  There will probably be lots of activity, as the areas have always been a place that Calis like to move to!  and since they are nearing (if not at) the age of retirement, it will probably be the last move for many/most of them.   

 

Now, to directly answer your question ..... one thing that Bruce Norris suggests is to do your homework and find the areas Top 5 Sales Agents.  Send a letter to them, saying you are contacting them because they are the top people in the area, and let them know specifically what you're objectives are, and what you are looking for.  Take them serious, and they'll take you serious.  Stats?  You can get alot of that online before you even decided if that is an area that interets you. You can also call the local Assessor/Tax/Housing Depts for stats.

 

Good Luck!   


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Suzanne

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Reply with quote  #13 

Thank you SoCalStan, Samson and Erik.  I love these posts that are just down and direct with the hard numbers and real life real estate challenges.  You are the best.  Thanks for the lessons.

 

Suzanne

Kali

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Reply with quote  #14 

I grew up in Houston and know the market pretty well. I really cannot understand why people would buy SFR there. There are no barriers to entry (millions of acres in all directions), the weather sucks, and alot of the areas are in the flood zones, you have risks of Hurricanes as well.

Our family purchased a home in the North side of Houston (decent area) 4br/2.5 ba, large yard, etc  for 72,000 in 1980.  We lived in the house and enjoyed it until 1993 when we sold it for $73,000.  $1,000 appreciation in 13 years. Today the house is worth around 100k.  Yes, there are many factors to consider but overall speaking very little appreciation.  Why would anyone would want to buy a 15 year old house when they could buy a new one for 20k more?

 

Do people seriously think the properties will appreciatte substantially like they do in California? Or are they basing it on cash flow, where I do not see how there would be a major profit when taxes are so high?

 

 

ISamson

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Reply with quote  #15 

I have not analyzed the Buy and Hold strategy for that area but I did attend Ron's Wholesale / Retail Bootcamp there in  1999  and learned of another gold mine that exists there.

 

Consider that Ron picks areas that are relative to the Strategy of the class at hand when he picks cities to hold certain events.

 

For example,  the other Wholesale / Retail Bootcamp of his that I attended was in San Bernardino,  where there are literally thousands of boarded up vacant houses.

 

Ok,  back to Houston.

 

Another Strategy he employs is to have his best Students show up and guide the class in the specifics of the area.

 

I don't remember the guy's name in Houston  ( Bob rings a bell ),  but this guy took all  100 +  of us Students back to his mansion property for a big Texas barbecue after he showed us how it was done in Houston.

 

This guy got wealthy relatively quickly doing just one major Ron strategy,  Retailing.

 

Ok,  finally to the actual detail of Houston that is the source of the gold mine.

 

To describe it simply,  there is poor soil there which causes thousands of cracked slabs which is a niche unto itself.

 

So basically the local Pros were doing hundreds of these types of deals along with the standard ugly house type.

 

 

P.S.

 

In case you are wondering if what I say is just what I heard in the class and not accurate,  one of the great beauties of his Bootcamp is that they rent a luxury tour bus and cruise the students through the neighborhoods and actually see face to face the numbers of vacant ugly properties.

 

We even peel back the plywood,  go inside and practice estimating repairs,  and then have the Realtor leading the tour present offers with the  MAO  formula !

 

Great Bootcamp !

 

 

 

 

 

 

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