Identifying Undervalued Neighborhoods

I remember having a conversation about nine years ago with a very wealthy individual about what neighborhoods would have the best future appreciation in the local real estate market. She replied, “That’s easy, the same neighborhoods that have always had the best appreciation.” I nodded my head in agreement. It seemed like the perfect answer. But there was something in me that didn’t totally buy in. If neighborhoods appreciate at the same rate they always do, then how are gentrifying neighborhoods with rapid increases of home values explained? What causes the exceptional upward momentum of rising prices?

By the time I had that conversation, I had witnessed several neighborhoods in Nashville, TN experience rising property values that did not line up with their historic appreciation rates. They were beating their previous track record. Those neighborhoods had been undervalued, but began over-performing to compensate. Renovations were being completed by homeowners and investors alike. ubanAs more dollars poured into the improving neighborhoods, others took note and wanted to buy in as well. Activity furthered more activity, and successful flips led to more investment projects. I watched with a desire to understand what market forces were at work. And I began to anticipate what neighborhoods might be next. I knew that being able to identify undervalued parts of town would be key to future investment success.

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House of the Week – S. 14th St.

East Nashville, TN is the location of the featured house of the week, where 909 S. 14th St. was just listed for sale for $359,900. A “custom” renovation was completed on this two story home that has three bedrooms, two and a half baths, and 1,580 square feet of living space. The listing agents Chad Sain and Matt Read, both with PARKS, call it a, “One of a Kind Charmer,” and instruct potential buyers to, “Stroll on Over to have All Your Dreams Come True.” Apparently the agents are fans of excessive capital letters and hyperbole. But their asking price of $227 a square foot is no exaggeration.

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“Before” condition, when I briefly owned the house.

I was very interested to see the final photos of this listing, as I sold this house in July, 2014 to the investors who renovated it. They had a great idea to add a second story on top of the existing cottage, doubling the total square footage. When the sales price per a square foot has a hefty margin over the cost to build per square foot, it is smart to add on as much as the neighborhood comps can support. Interestingly, the back corner of this property is in Metro Nashville’s flood overlay zoning designation, which means Metro will not allow an increase to the building footprint, meaning the structure cannot be expanded outwardly in a horizontal direction. When that is the case, building up is the best option.

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“After” condition, with a new 2nd story.

I had purchased this property at a foreclosure auction two months before I sold it to the renovators. It was a sad, dirty, single-story house that had been vacant for years. I toyed with the idea of conducting the renovation myself, but elected to clean out the trash and have my realtor put it on the MLS instead. It sold in about two weeks for $95,000, which was the cheapest priced home in the 37206 zip code at the time. The investors

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Amazing Repurposed Silo House

Living in an old grain silo doesn’t exactly sound very sleek or stylish. But architect Christoph Kaiser transformed a Kansas farm silo he bought online into a unique custom home that showcases inventive use of space and incredibly beautiful materials. He lives in the home with his wife in Phoenix, AZ. It is comprised of 190 square feet of living space, and has an additional sleeping loft. Ten inch thick spray foam insulation was applied between the shell of the silo and the finished interior walls, resulting in a tight, efficient dwelling. The majority of the interior wood is walnut that Kaiser purchased from Craigslist for $350. After much thoughtful planning and labor to finish the silo, it appears the Kaisers will be reaping a harvest of comfortable living for years to come.

All photos by Mark Lipczynski.

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House of the Week – 22nd Ave. North

Our featured house of the week was just listed days ago in an incredibly desirable area near downtown at 333 22nd Avenue North, Nashville, TN 37203. The location is between West End Avenue and Charlotte Pike close to several medical centers and other offices. The house was built in 1899, and according to the MLS listing has 3,527 square feet. The tax records have that figure at 5,613 square feet from multiple additions that were made to the original structure. One of those additions has literally collapsed to the ground, and another is sagging badly and is not salvageable. I think the listing agent, Patricia Corcoran with Allison James Estates and Homes of Tennessee, went ahead and deducted the collapsed square footage to arrive at her more accurate figure. I went to view this property within an hour after seeing that it was for sale. Why the urgency? It is priced at only $239,000.

Despite the very poor condition of the building, the price is very enticing. Metro Nashville’s tax appraisal for the land alone is $273,000, and their assessments have been lagging behind the market values for the inner-ring neighborhoods for about two years. Adding just a minimal value for the original structure easily puts this property over $300,000.

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The foursquare still has lasting curb appeal, despite the poor decision to enclose the front porch.

The property is zoned MUG-A (mixed use, general, alternative), which according to Metro Planning is, “Intended for a moderately high intensity mixture of residential, retail, and office uses.” The location would be perfect for a law, medical, or accounting office. The building could even house a small design or marketing firm. MUG-A zoning provides the opportunity for creative uses of the space, including making the top floor and basement levels residential units, while the main floor is an office.

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One Deal Lost, Negotiating Over $5,000

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?

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One House I Wish I Hadn’t Sold

In the fall of 2010, I was looking for a house to flip. I viewed several different options and settled on a cottage in East Nashville. It was a bank owned foreclosure that needed cosmetic updates on every surface and a re-imagined floor plan. But it had a lot of profit potential, so I closed the purchase in November, 2010 for $67,500. I was optimistic while preparing to embark on a four month renovation. Even though the real estate market was struggling all across the country, I liked the location of the property a lot and thought it would have sufficient demand that would result in above average appreciation. Little did I know, the house would sell for nearly five times that amount three and a half years later.

11th S. 11th Street. Nashville, TN 37206

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