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Shadow Inventory Undermining All Major Metro Markets Now


In order to make an informed decision, you need to have a good sense of what's coming down the pike. To do that, it is essential to consider the so-called "shadow inventory."

What's more, as I mentioned earlier, all-cash investors have kept prices from completely collapsing. Who are these investors? In mid-November, I talked with Glenn Plantone, a broker, investor and major player in the Las Vegas market. He stated that he had a database of roughly 2,000 investors thinking of buying. More than 90% of his investor deals were with all-cash buyers. Roughly half of them were from other countries. Many were from Canada and a considerable number from India. He told me that the American investors were looking for a better return on their money.

His focus was on distressed properties. Because investors had run up the prices of low-end foreclosures, he had shifted into more short sales. His strategy was to buy distressed properties, do light rehabilitation, and then resell them to eager all-cash investors. Before he sells the property, he brings in a tenant under a lease/option-to-buy arrangement. Many had lost their own home through foreclosure or short sale. He explained that they willingly paid several thousand dollars for the option because it was credited toward the purchase price if they decided to buy. The tenant was also willing to pay an above-market rent because a few hundred dollars would also be credited each month to the purchase price if they bought the house.

Now you may be wondering that if it is possible to buy a house and find tenants willing to pay above-market rents, why not do this? That is a good question.

It is not too difficult to locate a decent house to buy in Greater Las Vegas for $100,000 to $150,000 if you do some careful searching. Foreclosed properties under $100,000 are also plentiful. But you certainly want to avoid the trustee sales on the courthouse steps where you would end up bidding against other investors. That's not smart.

The important question is whether you can find a quality tenant in a reasonably short time. And what kind of rent will your property command? Be very careful talking to brokers or property managers with the hope of getting accurate market data. They are not an unbiased source of information. So where can you turn to get reliable numbers?

Before deciding whether a single-family house or condo makes sense as an investment for you, it is imperative to examine comparable properties which actually leased within the last three months.

I've done some digging and discovered that you can make use of Las Vegas realtor Renee Burrows' terrific search tool on her website. Just go to her site and press #8 to search for house rentals that have recently-signed leases. You can then input whatever parameters you want to look at including geographical area and the date on which a signed lease was closed on a property. You will learn both the listed rental amount asked by the owner and the actual amount agreed to by the tenant. I tried the search tool and it works great. She also has some good statistics and charts.

After obtaining this up-to-date rental market information, you can then put pencil to paper and use conservative rent, vacancy and expense estimates. Make sure that the cash flow on the property will be positive.

Advice for Investors

If you are comfortable with the scenario I've been painting for the Las Vegas housing market and the likelihood that prices could decline 10% or more in the next year, then do your due diligence work. Run a cash flow analysis with the tools I've provided. If you want to make an offer on a property, I suggest that you go in with a low-ball bid. Here's why.

I had been closely following a decent foreclosure property in New Haven, Connecticut offered by HUD. The price had been lowered to $98,000 in August 2010. I lost interest in the property but then recently learned that it had been sold in October for $55,000. Some smart buyer went in with a low-ball bid and guess what -- HUD said okay. Fannie Mae, Freddie Mac and mortgage servicing banks might do the same.

However, if you're likely to toss and turn worrying about how low prices might go, here is my advice. Sit tight for now. Wait about 12 months and see whether the huge shadow inventory has been whittled down. You can then revisit the situation and decide whether it is finally time to invest in Las Vegas. I will be updating the Las Vegas market.

Advice for Homeowners Hoping to Sell

Countless homeowners are understandably frustrated with how long their property has languished on the market. They may have listed it months ago but have gotten little traffic. Some may have dropped their asking price once or even twice without success. Others have pulled their house off the market with the idea of waiting until the market strengthens in the late spring.

Is it a smart move either to refuse to drop your asking price or to keep your home off the market with the hope that buyers will be willing to offer more as the peak selling season approaches?

After researching numerous major housing markets, I have found that many sellers are listing their properties as if this were 2006. It just doesn't work. The following data from ZipRealty shows the decline in median asking prices that has occurred in six major metros.

Notice that the median listing price for properties actively for sale dropped steadily in all six of these major metros. The largest decline actually occurred in San Diego, another metro tracked by ZipRealty, where the average listing price plunged from $649,000 in July 2009 to only $379,000 in January 2011. Even the relatively strong market in Washington D.C. saw average listing prices drop 10% between November 2009 and January 2011.

Home sellers need to seriously consider these figures. Listing prices are falling under the pressure of buyers saying "No thanks" to the asking price. While there may be other factors, the main reason your house is not selling is because it is priced too high for your particular market.

If you are a homeowner hoping to sell your property, it's essential to take a good look at your situation and the state of your local housing market. Just about any house will sell if it is properly priced. This means what an active buyer in the market is prepared to pay for your property. Unfortunately, that buyer does not care if you have financial problems or that you don't want to consider a short sale.

You need to do your homework and ask these questions: What are truly comparable homes actually selling for in your neighborhood right now? How likely is it that your market will strengthen when the peak selling season arrives? If prices were to decline another 5-10% or more in the next year, would you feel awful if you delayed selling?

To answer these questions, you'll have to find the most accurate information that can inform you about the state of your market and where it is probably heading. Local brokers may not be the best source of market data for your property. They are not disinterested parties and may be looking to get your business. At the very least, compare what they tell you with what you read in this report.

In each issue of this report, I will try to provide relevant data that home sellers or potential sellers find useful in deciding what to do. The section of the report geared to investors has obvious implications for you as a seller. I will be doing a feature on all of the nation's 25 largest metropolitan areas over the next year. Stick with us and we'll help you to make a smarter decision about selling your property.

Next Issue: Miami-Dade County
Coming Soon:
Washington DC
San Diego
New York City Metro area

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