Beware of buying a 1×100 plot of land between villas at a real estate auction

One man was surprised to find out what he actually purchased in a Florida real estate auction:

Kerville Holness thought he’d done a great job snapping up a $177,000 Tamarac villa for only $9,100.

He got a 1-foot-wide, 100-foot-long strip of land on Northwest 100th Way — valued at $50.

It starts at the curb where two mailboxes have been installed, goes under the wall separating the garages of two adjoining Spring Lake villas, then extends out to the back of the lot…

The message from county officials and real estate experts is that auction participants need to do their homework and make sure they’ve checked for all possible problems a property might have…

Real estate is a hot investment option these days. Add the interest people across the United and world may have in property in southern Florida plus the ability to purchase online and you could get more situations like this. How many people would be willing to purchase a property without ever seeing it?

Perhaps the answer going forward is that a lot of people would be willing to do this. If you can buy a car without driving it first, then more and more properties and units could go this way. In hot markets where properties go fast and the competition is fierce, it probably already happens at higher rates.

I wonder if at some point there could be a local backlash about Internet property sales. Just the idea that someone from anywhere could purchase land or buildings might make some nervous. Takes places like Vancouver or southern California where outsiders are making a lot of purchases. Or, perhaps the backlash from angry buyers who did not get what they thought they would (such as in the story above) could change Internet property sales. What format or what details are needed to truly make physical property a salable commodity to Internet buyers all over?

Reporting on the return of investment for house flippers

Selling flipped homes is up while the average return on investment for flipping a home is down:

Homes that were resold within 12 months after being purchased made up 7.2 per cent of all transactions in the first quarter, the biggest share since the start of 2010, Attom Data Solutions reported Thursday. Meanwhile, the average return on investment, not including renovations and other expenses, dropped to 39 per cent, an almost eight-year low…

“Investors may be getting out while the getting is good,” Todd Teta, chief product officer at Attom Data Solutions, said in the report. “If investors are seeing profit margins drop, they may be acting now and selling before price increases drop even more.”

Three quick thoughts:

  1. The return on investment for flipping a home is down. Changes in the real estate market mean there are fewer homes with large return potential. I wonder how much of the lack of such homes is due to fewer homes on the market versus sellers getting better at pricing their homes versus multiple kinds of investors driving up prices at the lower price points.
  2. The return of investment of 39% sounds high…until you factor in “renovations and other expenses” which are not part of the figure. So what is the actual average return on investment once factoring in everything? 5%? 15%? This initial figure then helps make sense of the need of flippers to reduce expenses and make cost-effect renovations because those decisions directly connect to profits.
  3. Thinking of the money in house flipping, I have seen little about the accuracy of HGTV shows and other shows that often provide a purchase price, expenses summary, and then give a profit at the end. Are those figures normal? Do they represent unusual housing markets and/or unusual advantages to being part of a TV crew doing house flipping?

Argument: Trump “is acting like a real estate developer”

Want to understand the behavior of President Donald Trump? Megan McArdle suggests he is simply doing what a real estate development might do:

Because what you see on TV shows about house-flippers is, writ large, the nature of the whole business: To compete in a highly capital-intensive industry, almost everyone takes on a lot of debt. Like most real estate people, Trump loves debt — “There’s nothing like doing things with other people’s money,” he told a rally in 2016. “Because it takes the risk, you get a good chunk of it and it takes the risk.”…

That’s why the real estate business rewards a certain willingness to put everything you have on a long shot; if you can’t cheerfully take risks with horrific potential downsides, you need a different job. The best argument for this approach is that some problems can’t be solved any other way — if developers demanded steady, predictable incomes like the rest of us, most of America would still be farmland.

In its best form, the developer’s way of thinking can achieve the impossible — or at least what the more staid and methodical folks said was impossible. I opposed moving the U.S. Embassy to Jerusalem and was at best ambivalent about sticking with Kavanaugh, but I have to admit that the apocalyptic doom predicted by Trump’s opponents has so far failed to materialize, while the political gains were immediate, and large.

Then again, there’s a reason most of us don’t live like real estate developers, or want to. Bankruptcy is a sadly normal fact of life in the real estate business, which is why Trump can tout his extensive experience negotiating with creditors. The cost of gaining wins with big bets is that you never know when you might lose everything.

Analyzing behavior and motives from afar is a difficult task. Yet, this argument raises some interesting questions:

  1. Could an average American describe how a real estate developer operates? A few might be known to a broad number of people but I’m guessing many operate behind the scenes. And these developers can significantly effect communities.
  2. It would be interesting to know how the president polls among real estate developers. Would they proudly call him one of their own? Would they recognize the approach?
  3. Are there examples of other real estate developers who became political leaders? If so, did they act in similar ways?
  4. Is there a way to quantify or easily explain the amount of influence real estate developers have had in cities or places? Donald Trump was a big name developer: widely recognized, some degree of wealth, and a number of large buildings with his name on it. Yet, how much did he influence New York City or other locations?

 

Coldwell Banker’s map of Chicago area locations missing parts of Chicago

A Coldwell Banker insert in the Chicago Tribune included a map and listing of all their Chicago area locations (zoomed in portion below):

ColdwellBankerChicagoMap060219.jpg

It is easy to see all of the suburban locations, particularly in the north and west suburbs. In contrast, check out the city map. From my count, there are seven Chicago Coldwell Banker agencies. Five of these are on the north side. Two are not: one in the West Loop and one in Hyde Park.

But, the Chicago map does not just show disparate locations. It is not an accurate map. The city is oddly shaped. Let me count the ways:

  1. It has an oddly drawn western edge that happens to make the south side much smaller.
  2. The west and south sides do not exist in their full form compared to the north side which looks like it has the biggest area.
  3. The West Loop location should be roughly in the center of the city – it is not. The size of the south side is diminished.
  4. The locations in Chicago have a weird relation to each other. Why are the West Loop and Hyde Park locations so close to each other? According to Google Maps, they are an over 8 mile drive away from each other. Yet, Google Maps suggests the West Loop and Lincoln Park locations are roughly 3 miles apart.

Perhaps this is a function of making a map with labels (the text all has to fit). Or, this may be about marketing: Coldwell Banker has particular clients and they want to highlight their proximity to those potential customers.

Yet, the map severely distorts Chicago. As noted above, the west and south sides do not fully exist. Recent Chicago maps aimed at particular audiences have done this before. This map also hints at the relationship between real estate practices and decades-long discrepancies in where people in the region live. Real estate professionals are not passive bystanders in residential segregation; they were active participants working alongside lenders and governments. Homeownership today is still not completely a free market and is more available to some Americans than others. Coldwell Banker does not have locations in certain places and this likely has ties to race, ethnicity, and class as well as practices and patterns developed over decades.

I am not asking that Coldwell Banker open locations in certain places. I am asking for an accurate map that clearly shows where Coldwell Banker is and where it is not.

(And for those who think I am reading too much into this, my starting position is this: I assume race is a causal factor in American social life until shown otherwise, not vice versa.)

Selling and buying a home with iBuyers

Tech actors now in the real estate business continue to try to shake up the process:

They work like this: These companies, dubbed “iBuyers,” make cash offers for your current home at an algorithmically determined “fair market price,” allowing you to take the money, buy your next home, and move out at whatever date works best for you. The transaction closes in a matter of days.

The companies then clean and fix up your old house and sell it on the open market, collecting a fee from the seller. And because the price at which iBuyers buy the house is usually not the maximum the house would fetch if it was sold traditionally, they likely make a small gain on the sale price…

Perhaps the most striking evidence of iBuyers’ influence on the real estate industry came from Keller Williams CEO Gary Keller in January. When discussing the company’s intent to launch an iBuyer program later this year, Keller told Inman “I feel like I have no choice now.”

After posting $1.33 billion in revenue in 2018, Zillow announced a three- to five-year revenue target of a whopping $22 billion, $20 billion of which was projected to come from buying and selling homes.

It will be interesting to see how much iBuyers are co-opted or acquired by traditional real estate actors or whether they will stand on their own. And will this lower costs for consumers and/or give them advantages or will it consolidate power and knowledge into different hands?

Does all of this threaten to keep moving real estate toward a commodity? This appears to be the road we are already on with the shift from thinking about American homes as places to live and anchors in a community to seeing them primarily as investments and critical parts of retirement portfolios. Imagine doing more and more of this without seeing the homes in question and with lenders and middlemen who have little knowledge of the particularities of a neighborhood or community. Algorithms can do a lot – and possibly even reveal patterns humans tied up in local details have a hard time seeing – but they may have a hard time imparting the aesthetic and lived experience of homes and locations.

Going further, iff more people are moving toward less civic engagement, more engagement with screens, and social ties primarily chosen based on family, friends, and interests (some evidence to back all of these up), perhaps it may not really matter exactly where people live as long as it is relatively close to what they want. Why would you need to visit a place or pick a specific home or neighborhood if those local ties and interactions matter little?

“Millennials may (or may not) have killed” starter homes

A list of items millennials may have affected begins with starter homes:

Statistically, the generation that coined the phrase “adulting” has put it off longer than previous generations (see marriage, kids, home ownership). According to Zillow, millennials are currently the largest group of homebuyers, but CEO Spencer Rascoff notes that “starter home” inventory is limited, forcing millennials to rent until they can afford the bigger, more expensive crop of houses. On the bright side, chances are their Pinterest and DIY skills have their rentals looking lovely.

Many of the underlying economic factors limiting the number of and access to starter homes is out of the hands of millennials. Additionally, Americans as a whole are conditioned and pushed purchase and live in larger homes.

Theoretically, millennials could push back more on the delayed adulthood that is now common – but that has its own confluence of factors pushing adults toward achieving adult milestones later.

In the long run, it appears millennials still want to buy homes and are interested in a suburban life. However, this might look different: the process will be pushed back, homeowners may own fewer homes, and the homes themselves could be larger and have specific features. There will still be many smaller homes in the United States but they may require a good amount of renovation, may be fairly pricey to acquire, and Baby Boomers may be in them for a while. The homeownership process does not have to look the same in the future and there might even be some positive twists along the way even as it can be difficult to move away from established patterns.

Who owns large apartment complexes in downtown Wheaton?

The national and international flow of capital in real estate is a well-established phenomena in the biggest cities but it is recognized less in suburbs. Here is an example of this in Wheaton, Illinois:

In the bigger deal, San Francisco-based FPA Multifamily acquired Wheaton Center, a 758-unit property in downtown Wheaton, from Edge Principal Advisors of New York, according to a statement from HFF, the brokerage that arranged the sale.

It’s unclear how much FPA paid—the statement did not include a price and FPA and Edge representatives did not return calls—but the property was expected to fetch about $135 million, according to Real Estate Alert, a trade publication. At that price, the sale would generate a big profit for Edge, which paid $44 million for Wheaton Center in 2014 and invested about $40 million in a major renovation.

The seller of the other property might want to forget about Wheaton altogether. Invesco, an Atlanta-based pension fund adviser, sold Wheaton 121, a 306-unit apartment complex that opened in 2014, for $72 million, according to Connor Group, the Ohio investment firm that bought the property. That’s nearly 25 percent less than the $95.8 million Invesco paid in 2015 for the complex, 121 N. Cross St.

The main culprit: property taxes. Wheaton 121’s taxes rose so much after Invesco bought it that the added expense significantly depressed the property’s value, according to people familiar with the complex. A jump in the property’s assessed value pushed Invesco’s 2018 tax bill up to $2.0 million, a whopping 47 percent increase from 2016, according to DuPage County records.

I suspect most suburbanites know little about who owns major pieces of land in their community, let alone who owns large apartment buildings (which may be more or less common depending on the suburb). Unless the owner makes a big deal of their ownership with signs or presence in the community, daily life just moves on.

But, this infusion of money from far away could have a significant influence on a suburb. Local developers may not be interested in sizable projects or may not be able to access the same amounts of capital. At the same time, a local developer may be more attuned to local conditions. Presumably, all the owners of nicer properties want to be seen as good actors in the suburb but they may have varying levels of involvement and commitment to the exact community.