Las Vegas Real Estate In For Another Roller Coaster Ride

Las Vegas real estate is currently experiencing its largest upheaval since the bubble burst four years ago.  The passage of Nevada Assembly Bill 284 has resulted in extreme and far reaching consequences that have rapidly and dramatically changed the face of the Las Vegas real estate market.  Most notably has been the unbelievable drop in foreclosures over the last seven months and the resulting steep decline in standing inventory of REOs.  In August of 2011 there were 4,063 notice of defaults (NOD) filed in Clark County.  The notice of default is the first step in the foreclosure process.  In the following month, September 2011, there were 3,108 NODs.  Immediately after the passage of AB 284, in October of 2011, there were only 44 notice of defaults filed in all of Clark County!  44!  In the six months since that time the largest number of NODs recorded was 209 in January of 2012.

At first glance, one might be tempted to look at these numbers as a positive for the Las Vegas housing market.  If banks can’t foreclose then there will be no new foreclosures coming up for sale on the market (true.)  If there are no new foreclosures then the existing supply of distressed properties for sale on the Las Vegas MLS will be consumed (also true...there are currently only 400 REOs for sale, less than a two week supply.)  So once the REOs and foreclosure properties are consumed buyers will be forced to purchase “conventional” sales and pay the higher prices that those owners are asking for their properties (false...here is where the paradigm breaks down.)  In a perfect world, it would be nice to assume that falling foreclosure rates would signal a rise in home prices as potential buyers are forced to purchase homes through conventional channels and pay the higher prices needed to break even by sellers who bought several years ago when Las Vegas prices were on their way up.  Unfortunately, that’s not what is happening...and here’s why:

1.  Over 50% of sales in Las Vegas in the last three years have been cash deals.  Why?  Because the Las Vegas real estate market has been kept afloat by investors.  These investors have come in to take advantage of the great cash flow rates that can be generated by purchasing distressed properties, in many cases renovating them, and then offering them for rent to displaced homeowners.  But this equation only works if the homes the investors are purchasing can be bought at a cost low enough to allow the properties to cash flow once they are rented.  If there are no longer distressed properties to buy, the investors will not pay more for conventional homes, they will simply stop buying real estate in Las Vegas and move on to the next opportunity.  This will effectively eliminate over 50% of Las Vegas real estate sales, drastically slowing demand and dramatically hurting the Las Vegas housing market’s chances for recovery.

2.  Loans are still extremely difficult to come by.  It has never been harder to qualify for a home loan.  Many would-be buyers continue to be sidelined by lending restrictions and the ongoing credit crunch.  Some buyers have been able to successfully purchase foreclosures or REOs using hard money or alternative financing and then refinance into a more attractive loan after several months.  This type of purchase was only possible because of the instant equity available to home buyers when they purchase a foreclosure or REO.  Eliminating foreclosure properties from inventory eliminates this option.

3.  Even when potential home buyers are willing to pay the asking price on a conventional sale and have the necessary pre-qualifications to obtain financing for a home purchase, properties are simply failing to appraise for the sale price.  We have run into this time and time again when selling our own properties.  Because the only comps available to appraisers, in many cases, come from years worth of foreclosure sales, the properties are just not being appraised high enough to allow sales to go through with financing.  This means that even when owner occupant buyers are willing to pay the price that the seller is asking, the banks are not willing to finance the purchase without a qualifying appraisal...thereby killing the deal.

Of course these are just the immediate effects of AB 284 on the market itself.  None of this takes into account the effect that AB 284 is having on the lending institutions themselves.  If the banks are unable to foreclose on non-performing assets, they are unable to put themselves in a position to be able to loan more money...a situation that further delays the recovery of the lending industry and the end of the credit crunch.

Now What?

The logical next question for investors is, “Does this mean that the Las Vegas real estate market is dead for investors and it’s time to move on?”  The short answer is “No.”  There are still great deals with tremendous cash flow to be had in Las Vegas.  But you have to know where to look.  The strategies that were working six months ago are not working now.  The trustees’ sale is hopeless.  What few properties that are available are being bid up to prices that no longer make sense for an investor.  REOs are almost non-existent and are also selling for ridiculous prices.  So, once again, we have had to reach deep into our bag of tricks, completely reimagine our acquisition process, and find a way to secure high quality, high cash flowing properties for our investor clients...just like we’ve been doing consistently for the last three years.  In the second part of this article, I will tell you how.

Until then, if you are interested  in learning more about how to invest in the new face of Las Vegas real estate please contact me directly:

Glenn Plantone
VIP Realty
(702) 656-3264 xt: 203
glenn@teamplantone.com
www.teamplantone.com

Three Methods for Valuing Property - And How They Matter to Investors

When we talk about what a property is “worth” we are making a judgment as to the value of that property. As real estate investors, it is crucial that we be able to accurately determine the values of our current holdings as well as our potential investments. In this article I am going to discuss the three main methods used to value property and how each of them pertains specifically to real estate investors.

Comparables

Sales comparables, or “comps”, are the most widely discussed and understood method for valuing residential real estate. This method of valuation has absolutely zero correlation to any tangible or permanent value (such as the cost of materials or land.) It is based solely on the laws of supply and demand. According to sales comparables, a property is worth exactly what consumers are willing to pay for it at that time. The most important aspect of correctly using comps to determine the value of a property is making sure that there is an apples to apples comparison. Every effort should be made to compare the home being valued with homes of similar size, location, amenities, finishes and condition.

Unfortunately, in the last year, we have run into major difficulties in the Las Vegas real estate market obtaining fair and accurate appraisals for our newly rehabbed properties. This is because some appraisers insist on valuing our completely turn-key, fully renovated properties at the same price per square foot as damaged foreclosures or REOs in the same neighborhood. I have spoken to numerous colleagues around the U.S. who are encountering similar difficulties. As an investor, when you are looking to value a property prior to purchase, it is important to note the condition of your prospective investment in comparison to other properties that might be listed as comparables.

Capitalization Rate

The most popular method used by investors to evaluate a potential purchase is capitalization or CAP rate. CAP rate is determined by dividing the Net Operating Income of a property by it’s acquisition cost. For a more detailed explanation of how to determine a CAP rate CLICK HERE to read my article on this subject.

Several factors go into determining what makes a “good” CAP rate for a particular investment property. Here in Las Vegas, we tell our investors to shoot for CAP rates of 10% or greater. For a more thorough discussion of what makes a good CAP rate please CLICK HERE to ready my article.

Builders’ Replacement Cost

The final method used to determine property value is builders’ replacement costs. This references how much it would cost in the current market to rebuild a particular property in the event of a total loss. To determine this, the total square footage of a structure is multiplied by the current cost per square foot of new construction in the area. This valuation is often used by insurance companies who are underwriting properties for homeowners’ policies.

For investors, builders’ replacement costs can provide a helpful benchmark for giving properties a more tangible valuation then comps alone. Investors who took note of the huge gap between builders’ replacement costs and actual market prices in Las Vegas in 2007 realized that a market correction was imminent and inevitable.

With completely renovated properties selling below builders’ replacement costs and CAP rates higher than we’ve seen in decades, now is the time to invest in real estate in Las Vegas. If you are interested in learning more about what Team Plantone has to offer investors, please contact Glenn.