By Mike Bodeen · 8 June 2015
When Highest Isn’t Best
I’ve got this terrific income property (multi-residential) newly listed that includes four 2 BR Duplexes (8 units) in Phoenix with solid monthly income of $4800 and a Cap Rate of near 8%. The owner, unlike many landlords, has taken the last 2 1/2 years to repair, improve, enhance and create an atmosphere of good will within this property. There is almost a 0% vacancy rate. Recent improvements include new roofs on 4 units, newer windows, A/C units, kitchens, baths and more. The price is $450,000.00.
Immediately I received an offer on the property for $475,000 – $25,000 more than asking. That’s the good news. Upon closer examination the offer began to deteriorate. First off, the buyer never looked at the property and never called me. Sight unseen deals are often bad for many reasons but that’s a topic for another Monday Snapshot.
Then, the down payment amount: $10,000 — period. Just over 2%. Well, okay maybe they’re offering a higher rate of interest for the higher risk involved, Right? Wrong Kemo Sabe. Interest rate offered: 0%. (btw; In the 2013 film of the Lone Ranger, Tonto said that Kemo Sabe means “wrong brother”). It certainly fits here. The offer stated the payments would be about $1600 per month for 8 years and the balloon balance due at that time. Even considering the additional $25,000 the buyer would pay over asking, the effective annual interest rate over 8 years would be less than 1%.
Now the real scary possibility: With this offer, a buyer could theoretically close escrow, never make a payment to the seller, or pay anything at all towards the property including taxes, upkeep etc, collect many months of rent (probably at least ten) which in this case would be $48,000 before the foreclosure would end. Buyer’s original investment would be about $12,000 including closing costs. The return of $48,000 in ten months would bring a rate of return of over 300% plus. Then perhaps the seller would get the property back with vacancies and who knows what condition. A poor choice.
So what initially looked interesting on the surface would be near malpractice for me if I suggested to my client that this was a good deal for them.
Owner financing can be beneficial for a seller as long as there is sufficient “skin in the game” from the buyers. But not with this offer. Not on my watch.
Institutional Lender Liquidates 226 Maricopa County Homes
A Concern for the Market Supply Side?
It has been a genuine concern for many in the real estate industry for a number of years now that the thousands of homes purchased by institutional investors 4-5 years ago could get put back on the market all at once, flooding the market with excessive inventory thereby driving down prices. One such sale happened the other day.
On June 1, an institutional investor, American Residential Properties sold a large number of rental properties in Maricopa County. Has this liquidation started?
Apparently it hasn’t. As it turns out the buyer was a different institutional investor, American Homes for Rent. The 226 homes involved in the transaction, with a total price of $38,345,009.26 cash, along with the affidavit suggests that AH4R intends to keep them as rentals.
Actually had this number of homes come on the market all at once, my opinion is that they would have gotten swallowed up without changing the market one iota.
(This information was sourced from Michael Orr of the Cromford Report/ASU)
Market data referenced in this article comes from The Cromford Report.