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Cliff Hockley, CPM
President, Bluestone & Hockley Real Estate Services
Welcome to Central Oregon -- Lake County to be exact. I am gazing out the window of my cabin overlooking Summer Lake, one of the most beautiful places in Oregon. This is a county of deserts, forests, rangeland, lakes and cowboys.
What you won’t find is many people. There are approximately 7000 people in Lake County -- an area of 8,275 square miles, about the size of Israel. There are more cows than people here. What difference does that make? To a real estate investor, it makes a substantial difference.
For example let’s take the town of Fort Rock, Oregon. Located about an hour south of Bend, Oregon (one of the currently fastest growing cities in Oregon with over 68,000 inhabitants, up from 20,469 in 1990), Fort Rock was a busy town in the early 1900s.
Today 19 people live in Fort Rock along with one church, a new fourplex, a new “out of business” restaurant and a museum. The old-timers here are hoping for investors who want to buy a second home “cheap.” You could buy the whole town but the question is, does it make sense?
That is the question all real estate investors should be asking themselves. Are you making an emotional decision or an investment decision when you buy real estate?
Baby Boomers are preparing for retirement and are repositioning their assets to locations where they think they can afford to retire. Californians are redeploying to Utah, Florida, Arizona, New Mexico, Washington, Oregon, and Nevada, to name the most popular states. They hope to sell their $500,000- $1,000,000 houses in California and buy a $250,000 house in another state. That leaves them at least $250,000 as a nest egg to help them in their retirement since they lost a sizeable portion of it in the stock market tech bust. Low long term interest rates have sustained this trend over the past three years.
But then again, the question is one of timing. There is a lot of cash in the marketplace that is looking for a home. Banks are feeling the pressure to keep a certain volume in the pipeline, therefore with the help of the Federal Reserve and low inflation, short and long-term interest rates are very low.
The Seller
What impact does this environment have on you, the Seller? This could be one of the best times to take your money and run. This is the time for you to take home cash. If on the other hand you prefer to complete a tax deferred 1031 exchange, then you need to think twice. Finding a property that makes sense and makes money (i.e. has a positive cash flow), is very difficult. There is a lot of real estate for sale, but most of it with very low cap rates or with warts on it.
Bear in mind that it is only 2 ½ years until 2008. In 2008 there will be no federal capital gains tax. You could strategize contract sales now to carry paper until 2008, or you could accept offers on deals that will not close until 2008. It is never too late to plan ahead. (You do need to check with individual states to see how they are handling capital gains taxes in 2008).
The Buyer
Don’t let your emotions direct your buying decisions. Be thoughtful with how you invest your cash. Two weeks ago one of our very best clients sold a property with the intent of buying another using a 1031 exchange. He had over $400,000 to invest. He made seven offers in the last three weeks of his 45 day identification period - many of them over the asking price. In every case he was out bid, and had no choice but to pay the capital gains taxes. He was smart, however, in that he did not want to overpay for the asset. Those that overpay will need to increase their down payments from 25% to 30% or more in order to meet the loan to values requirements, and will have to make sure that the property will appraise at the sale price.
As you purchase your new properties, pay close attention to the new and even higher prepayment penalties the banks are putting in place. Prepayment penalties used to be normal in fixed rate loans, but are now appearing in Adjustable Rate Mortgages (ARMs). These prepayment penalties may take a lot of future flexibility out of your transactions. Suppose you buy a property and it does not work out as advertised? A high prepayment penalty may keep you from selling the property and getting rid of your problems. Don’t forget to plan your exit strategies.
Back to the Main Story
The real story is playing out in large and small towns all over America. Anxious to get on the real estate bandwagon, many small investors and first time home buyers are purchasing property with 100 % leverage, no money down and builder concessions for closing costs. Many of these buyers have weak financial statements and could lose their homes and investments as soon as interest rates take a run up.
Some investors are betting on the spread. In other words, they buy in areas where they see tremendous appreciation. This will continue in large cities with airports and great infrastructure, and in some second tier cities that have planned ahead, have an existing job base, and have attracted new medical centers to service aging baby boomers.
But in Lake County, where you can drive up to 2 hours before you find a grocery store or a doctor, real estate will appreciate much more slowly. There are very few jobs in Lake County unless you are a rancher, work for the government, are involved in the lumber industry, or are have ties to agriculture. From experience, I can tell you a good side road is one that is graveled. Don’t look for any freeways here. Infrastructure for population growth does not exist.
The bottom line is, be very careful as you make your investment decisions and keep a 00.c0lose eye on the calendar, 2008 is very close by.
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