As spring 2015 nears it’s merge into summer, it feels like the right time to begin discussing the recent events of real estate investing. I apologize, dear reader, for my recent absence from writing on The Urban Investor site. Due to the increased priority of a new musical project, I won’t be churning out the articles quite as frequently as the “grand opening” of the site. However, real estate discussion is too fun to stay away from for too long, so indeed there will be periodic posts.
The Nashville, TN market is remarkably on fire right now. According to one report ranking The Top Single-Family Housing Markets it is third in the United States, trailing only Denver, Colorado and San Antonio, Texas. But it isn’t only single-family homes that are garnering attention. Music City is teeming with new developments including condos, apartments, hotels, office space, retail and commercial projects. I wrote about my concerns for a potential housing bubble, and I still have those concerns. However, the demand for Nashville property has shown no signs of slowing down in 2015. In fact, there has only been increased demand since 2014, adding more fuel to the fire.
From an active investor’s perspective, it is a wild and exciting environment. I compare the real estate market to the food chain. Hovering around the top are multitudes of hungry home-seekers. They are waiting for new listings of quality houses they can devour. Some are buyers and some are renters. They want to live in Nashville, and they are having a hard time finding the house they want for the price they want. According to CNN, about 82 people are moving to Nashville every day. These folks are growing increasingly frustrated with the limited inventory of rentals and homes for sale. As their searches drag on, they tend to lessen their demands from their initial checklist of what they were looking for. Often they settle for a house that is either smaller, uglier, or not in the location that was originally desired. Or else they elect to pay more.
As a real estate investor, I tell people in the business that I am always buying. What I mean is that I will consider any property that is available for purchase, and if it seems like a good deal, I will make an offer. If it is a great deal, I won’t hesitate. Some sellers want too high of a price based on the location, size, and condition. I don’t waste time making an offer when their price and my valuation are too far apart, but I still think through the possibility. I like to contemplate lots of deals, because essentially nearly every property is worth buying at the right price. I know I can’t buy everything, nor do I want to. But analyzing hundreds of deals and thinking through the numbers is something I have practiced so much it is almost automatic. When a property comes along that is priced well below the market value, I can spot it quickly and it is a simple decision to buy. It’s easy to point to the great deals that I have purchased over the years and think they are the reason my investing career has succeeded. However, another factor is just as important: being able to turn down a deal when the numbers don’t work.
I usually have a real estate transaction every few months. I get used to the rhythm of buying and selling. Sometimes, like in the fall of 2012, I bought two houses in a five week span, and three in three months. But other times a few months goes by without any
I received a phone call yesterday from a wholesaler in Nashville, TN who said he had just gotten a house under contract and asked if I was interested in buying it. He told me the address, price, and a few facts about the property. The location in East Nashville is close to two other rentals that I own, so I was very familiar with the particular street and the surrounding area. It seemed like it could be a good deal, depending on the condition. I knew he had other investors that he was talking to, so I didn’t hesitate to check it out. Within fifteen minutes of the phone call, I was knocking on the front door.
The quick purchase, wholesale house
A little over a year ago I came across a small vacant house for sale in Nashville, TN near one of my target investment areas. I spoke with the owner over the phone about some of the facts of the house and got as much information as I could. He was a friendly guy with a southern accent, what many from this region would call “a good ol’ boy.” His asking price was $40,000, which was incredibly cheap, but the house was only 672 square feet and it had been moved to that parcel from a different location. The fact that it hadn’t been built on-site was definitely a concern for future resale, as many buyers worry about the unusual. I asked him what his lowest price was for an all cash, no contingency offer, with no inspections and a quick closing. He said $30,000. Wow. Had I really gotten a drop of 25% of the sales price that fast? Could it be that easy? My typical negotiating approach is to initially get the seller to say their lowest price and then counter-offer a bit below that. I got him down $10,000 with one question. That was sweet, but I wasn’t satisfied. How cheap could I get this little cottage for?
I received a phone call a few weeks ago from a wholesaler who had “the deal of the century.” She talked about how it was a can’t miss opportunity because the house only needed a few updates to be an easy flip. She had my full attention. As she was beginning to embark on a rapid-fire detailed list of all the attributes of this moneymaker, I tried to interrupt. Finally I was able to get my question in. “Where is it at?” She told me it was in a nondescript suburban area of town about fifteen miles southeast of the urban core of Nashville, TN. For some major cities, that proximity would still be considered close to town. At this point in time in Nashville, it is farther away than the zip codes where I want to put my money. In fact, that is how I answered the wholesaler. “I don’t buy houses in that zip code.” She didn’t seem to understand my reply and countered, “You could make $50,000 on this deal!” Maybe I could, but I have targeted specific areas of Nashville where I will buy properties, and I don’t stray from that strategy. I told her good luck, and if the deal was as sweet as she was describing it, I was pretty sure she could find an investor who would take it, but it wasn’t going to be me.
The single digit temperatures didn’t keep potential buyers away from the foreclosure auction in Nashville, TN last Thursday, January 8, 2015. There were three properties I was interested in and one I was planning on buying, so I wasn’t going to miss it. Here is my account of the events as they unfolded.
Over fifty people are gathered on the second floor of the Davidson County Courthouse lobby. They are still bundled in coats and hats, warming from the frigid morning. I see ten or eleven guys that are the same cast of characters I spot at nearly every foreclosure auction in Nashville, TN. They have their binders, notebooks, and laptops tucked under their arms. I nod at a couple of them, acknowledging that we recognize each other, and even exchange pleasantries with one of them. But I’m not too friendly. After all, they are the regular competition for getting the property that I want.
I wouldn’t consider myself to be a huge sports fan. I liked playing baseball and basketball as a kid, and the Cincinnati Reds and Indiana Hoosiers were my favorite teams. Pretty typical. After college I moved to Nashville, TN, and started rooting for the Tennessee Titans. I watched most of their games and followed the team news. The NFL became the only sport I really paid attention to. Three years ago a friend invited me to play in his fantasy football league, and I was hooked. Last year I played in two leagues, and this season I started my own. It turns out that the reasons I like fantasy football are the same reasons I like real estate investing.
The fantasy football season starts with the draft. Each of the ten teams take turns picking NFL players. When it is my turn to pick I analyze the available players. Who is consistently productive? Who is more injury-prone, and thus a higher risk? Who is a young guy ready for a breakout performance? This analysis is remarkably similar to the reasoning I use when examining potential real estate investment deals.
In August, 2014, I purchased an investment house in Nashville, TN that I found advertised on Craigslist. It was a rented single family house for sale by owner, due to a relocation out of state. I responded to the ad by email and requested the address of the property since it wasn’t stated. The address is required to move forward with any analysis, and to see if the deal is worth pursuing further. If I don’t like the location, I forget about it.
Next, I proceeded to do my usual information collection about a property. I look it up on the county tax assessor’s website to find out the lot size, square footage of the house, year it was built, zoning classification, past sales history, and appraised value. This data gives me an introduction to the property and lets me figure out the price per square foot. However, the square footage stated on the tax records is not always accurate, so it is wise to verify the actual area of the physical structure. In fact, the tax records were 600 square feet off from the actual area of my first primary residence.
The house on Craigslist had the two most important features that I am looking for in an investment property: location near a red hot neighborhood, and a cheap price tag. This house was just a couple of blocks from the historic Germantown neighborhood, and priced at only $72,000.