Efficient Market Hypothesis and the Creation of Multiple Real Estate Markets

Efficient Market Hypothesis and the Creation of Multiple Real Estate Markets

http://en.wikipedia.org/wiki/Efficient-market_hypothesis

The Board of Realtors®

The first and most obvious source of profitable real estate opportunities exist within each localized market's board of Realtors®.  A market is a place where buyers and sellers come together in an attempt to fulfill individual financial goals.  Semi-strong theory EMH states that buyers and sellers have access to all publicly available information and are able to participate in the market place, excluding insider information.  Does this theory work for real estate?  In a word, no.  Texas is a non-disclosure state, meaning that all information regarding real estate transactions is not available to the public but only to licensed real estate agents.  How does this effect the market?  In addition to several other major contributing factors, such as the uniqueness of each parcel of land, this aids in slowing the transaction speed thus helping to make real estate a non-liquid asset.  Below list some of the attributes of the BOR transactions

1. Access to information - Restricted to Realtors® 
2. Transaction speed - Slow, often 2-6 weeks
3. Capital required - Low, lenders plentiful and funds easily accessible
4. Opportunity to compare substitutes - High, options period allow for verification of condition

The board of Realtors® is a financial market.  Sellers enter the market with a product, in this situation a house for sale.  Buyers also enter the market with capital ready to purchase these goods.  'Financial institutions lend against real assets, securitize the debt, then sell it as an interest bearing note.   Each city has it's own board which has little to no interaction with boards in other cities thus making each individual area's board of Realtors® it's own independent and self sufficient market place.  Sales records in Texas are not recorded except by each market's BOR which typically only provide access to licensed real estate agents paying dues to that specific BOR.

The compartmentalization of the real estate market as a whole into each area's BOR restricts access for out of area buyers to readily participate, and in many cases, even individuals in that market.  It also allows for very different climates to occure in adjacent markets (such as the real estate markets in Dallas, Houston, Austin, and San Antonio).  Prices, regulations, inventory, lending practices, and zoning ordinances are just a few of the areas in which two markets can differ drastically.  To further complicate matters, products (properties) can not be transferred from one market place to another.  These factors will be discussed later and provide for very unique possibilities that simply do not appear in other markets such as the stock market.

The Foreclosure Auction

As if gaining access to reliable and readily available information did not already seem complicated, there are multiple markets that take place independent of one another in the same geographic area!  These markets also can contain the same products, simultaneously. How is this possible?  When a property is delinquent on debt payments and is filed for foreclosure a completely separate market is created by the judiciary system which investors have come to refer to as Texas Tuesday.  In contrast to the BOR the court auction involves transactions that happen almost instantly and completely in cash.  Information is publicly available to everyone or can be obtained from private providers for a nominal price (I think I paid $15 the last time I purchased a foreclosure listing book).  The court auction does not provide you physical access to the properties making the job of verifying the condition nearly impossible.  Below are listed some of the attributes of the foreclosure auction:

1. Access to information - Public record, easily available 
2. Transaction speed - 2-5 minutes depending on length of bidding
3. Capital required - High, all purchases are cash and non-refundable
4. Opportunity to compare substitutes - Low, houses are usually occupied and non compliant with investors.

Wholesale Property: The Third Market

The prevalence of investors in the market place leads to the generation of an entirely new and separate market place; the wholesale market.  These are properties that an individual contracts at a low price and then sell their interest to another individual.  These function in a similar way as stock options, futures, and forwards in the stock market in purchasing a contract for a good that can be purchased at some point in the future for a given price.  This produces a hybrid market of the BOR and the court foreclosure process with the following characteristics:

1. Access to information - Available only through the wholesaler.  
2. Transaction speed - 3 to 14 days in most cases
3. Capital required - Medium, financing in the form of interim bridge loans is available
4. Opportunity to compare substitutes - Generally low.  Depending on the amount of inventory your wholesaler is capable of providing you with.

These characteristics allow for some interesting things to take place.  Firstly, the availability of financing, despite much higher interest rates, allows individuals who wish to be come investors but do not have substantial amounts of capital to participate.  For investors who do have larger access to capital it allows them to minimize their exposure to each individual property.  This can also allow one to diversify their risk across several properties and increase their potential profits via economies of scale.  A longer period between date of contract and closing allows for investors to sort out the most profitable source of funds and to begin receiving bids from contractors so that the day after closing can also be the first day of construction. A large wholesaler can provide you a significant amount of opportunities in your market.  This benefits the investor by allowing them to make a purchase that they truly feel good about and have some time to inspect.

How does someone who simply sells a contract create value for an investor without increasing the value of the property?  Check out my article on Why it Makes Sense to Use an Investment Professional to read more about the benefits of utilizing wholesalers.  They are essentially the "One simple price" guys of real estate.  As opposed to conventional transactions that require submitting an offer and some intense negotiation (especially on the investment side), if you like the product that you see you can purchase it at a set price that day.

Texas Tuesday

Texas Tuesday!

I've been asked a lot of questions about how the auction works and what to expect when going down to the court to purchase real estate.  I hope that this article can shed a little light on some of the questions that I've been asked in the time that I have been going down with our team to buy houses.

The above two pictures show how packed the auction can get at 10 a.m. Texas Tuesday.  Over the last six months there have been more and more people showing up each month.

The picture above shows how many people stick around until the middle of the auction (around 1:30 p.m.).   There are just as many properties being sold now in the trustee sale as there are at 10 a.m.

The Sales

Sheriff's Sale

The first thing to note is beginning at 10 a.m. there are two types of sales taking place simultaneously. The Sheriff's sale takes place on the left side of the court steps and is a sale of all properties in foreclosure for delinquent taxes.  You must be registered for each sale with the sheriff's office (the sale for that particular month).  These houses have delinquent taxes owed to the county and bidding begins at the amount owed.  If you should purchase a property here you must take into account a time period called right of redemption.  For most properties this is a six month period during which the party being foreclosed upon can repurchase the property, no questions asked, back from you for the amount you paid for the property plus a 25% interest premium.  Houses that have been homesteaded have a TWO YEAR right of redemption.  

The message here?  Know what you're buying.  Buying a house for $500 can seem like a pretty sweet deal until you find out that there is a $100,000 federal tax lien against the property. (The IRS has a 120 day right of redemption and are pretty serious about collecting).  The lesson to be had here is that if you're looking at getting into investing in real estate, if you're not a full time real estate pro, if you saw a show on TV, this is not the place for you to roll the dice on your cash.  Any property you purchase here you are going to be holding for a while.

Trustee Sale

November's list of houses potentially for sale at the trustee sale was 1,310 properties.  These are released on the 15th of the month to people who purchase the list from on of the several providers.  That leaves you roughly three weeks to research and look at your potential buys; a formidable task to say the least.  The trustee sale is what people generally think of when they think of the auction at the court steps.  This is an all cash sale, so if you didn't bring your cashier's checks with you it's best not to get in the way of the people who did as it can get quite crowded.   By my estimates nine out of ten people who show up are not buyers in any way, shape, or form.  

Not all of the properties that have notice posted for foreclosure are actually sold at the auction.  A more realistic figure would be about one third of what appears on the initial list, however you never know which properties will be sold and which are coming off.  This can happen because the borrower worked out an arrangement with the bank or one of many other reasons.  Typically, multiple trustees will be auctioning off property at the same time.  Certain private companies that provide lists of the properties before the auction will have representatives present holding up numerical identification cards for which properties are currently up for sale (make sure you're paying attention to the correct numbers!).  

When a property comes up for sale it is referred to by it's legal description (lot and block).  The bank will almost always have an opening bid for the property.  This is the price at which the bank has agreed to purchase the property in the event that there are no higher bidders.  Most houses have so much debt attached to the asset that it doesn't make sense for an investor to out bid the bank for the property.  This is how a property because an REO or Real Estate Owned by the bank.  If the bank's minimum bid is lower than what you would pay for the property you can voice your bid to the trustee.  After winning the bid you will typically wait until the trustee has auctioned off all of the properties that they came to sell to present your cash and receive the deed.

What's the Game Plan?

Talk with someone.  You're not going to get good advice from someone who doesn't actively buy at the auction.  I'm sure most real estate agents know how the auctions work and how to participate but when it comes to throwing out hundreds of thousands of dollars in cash in one day make sure the person you're getting advice from knows what they're talking about.  It's far easier to make a bad buy than it is to make a good one.  Asking for advice at the auction is also not advisable.  The sheriff and the trustees don't have time to answer questions for new buyers and actual buyers are certainly not looking out for your best interests.  The people that make money buying here are possibly the hardest working individuals in the real estate market I have ever met and have been doing it for quite some time.  If you think that you're going to out smart a seasoned vet or have some information that no one else has access to, you may want to think a little harder about the circumstances surrounding the sale.  

If you do have questions on specifics of what is taking place reach out to me via email, phone, facebook, or any other social media.  

                  

Ryan Harthan

210-710-1617

rharthan@gmail.com

Top Spots to Flip in San Antonio and Why

Top Spots to Flip in San Antonio and Why

Every person who has seen a show about flipping real estate and comes into my office has the same idea of what they want to do in the business.  "I want a 3/2/2 with 30% equity, Northeast or Northwest side of town, that I can make at least twenty grand using hard money, and needs only cosmetic updates."  My response is always, "Yeah, me too.  If I had something like that I wouldn't sell it to you, I'd keep it myself...  It turns out that no one is going to give you $20,000 to carpet and paint a house, if you want to make money you're going to have to put in some pretty serious work."  To help new investors figure out what and where they need to be looking at I've comprised a list of areas I see moving.

Monticello Park

Check out my article about Jimmy's rehab project.  He got that house under contract in less than two weeks.  When I run comps out in Monticello I can't find a house in decent shape that has been on the market for more than 30 days which is your number one reason to buy here.  Houses have after repair values of around 170-220k but move unbelievably fast.  Most properties have mother in law's quarters as well adding an additional structure with a 1/1 apartment in the back.

http://www.sanantonio.gov/historic/Districts/Monticello.aspx

Windcrest

I have another article on buying houses in Windcrest that I posted earlier in the year.  You're going to be doing foundation repair 95% of the time, average age of the population is around 60, and you're going to see a lot of wood paneling and intercom systems.  ARV's are around 180-200k and days on market are around 60.  Lot's of retired vets from Ft. Sam live here and if you're doing any roof replacement you're likely going to throw a 30 year composite on it, just try not to choose green as a color. 

Tobin Hill

This area is dynamite and red hot for investors looking to flip.  Located between Trinity University, University of the Incarnate Word, San Antonio College, downtown, the McNay art museum, and the Whittie, this is and will be the spot for investors to seriously capitalize on rehabbing houses for the foreseeable future.  As of today you're going to see two types of houses in Tobin, ones that have been rehabbed and are being purchased by families returning from the far North suburbs to be closer to downtown and those that are falling apart and are ripe for the picking.  Lot's of pier and beam which means you're going to do some foundation correction but on the light side, it's a lot cheaper than slab work with low costs if anything goes wrong with plumbing.  ARV's from 150-200 depending on size and days on market 

45-60.

Monte Vista

Similar story to Monticello Park and just North of Tobin Hill, Monte Vista is the next neighborhood on your way to Olmos Park.  ARV's in the area look around 250-400k, depending on size, but you can expect to be doing a lot of work to achieve those prices.  Most houses with investor potential are going to need not just your average cosmetic and foundation repair but reconfiguration of interior layout in addition to major exterior work.  On the plus side, they sell quick at right around 60 days after listing.  You can expect to see some strange things when looking at these houses like copper roofs, three story houses (uncommon for San Antonio), basements, etc.  A lot of these quirky items can have major resell value and should be considered an asset rather than a deterrent.  Just remember the location of Monte Vista is ideal and that a good rehab will sell.  I envision a rehab here as being a house that was built in the 40's and trying to bring it up to a new build house today on the interior.

Alamo Heights

Best area to buy in San Antonio, enough said.  You can't overspend in Alamo Heights.  If you spend 15k on a kitchen instead of 5k you can simply raise your sales price 10k and get your money back.  You can't do that on a 135k house on the Northside.  You can add a couple hundred square feet to the house.  Why not? The price per square foot that houses are selling at is actually substantially higher than the cost of adding square footage to a house.  78209 zip code with AHISD schools are the most desirable houses in town.  It's been my experience that most investors in this area are going to be pros in this area and that newer investors are more hesitant to take on a project here.  It doesn't need to be that way with a good contractor and a good backside agent.  This is one of the best areas to attack using hard money financing.  As far as stats - you can rehab a house and sell it in Alamo Heights for anywhere between $250,000 and $1,500,000.  I see the average as around 400k with about 45 days on the market.

Northwood

I didn't even know this area existed until I started getting into the business more aggressively.  Close to 410 and Harry Wurzbach you can find houses worth 350k-450k.  A little bit farther south you can find houses in the 180-250k range.  Days on market in both the North and South areas hover around 60 days.  Some houses are NOT in AHISD which is important to consider for resale.  There's nothing exceptionally tricky to take into consideration when flipping a house here aside from that it needs to be well done.

Jimmy's Monticello Park Rehab

Jimmy's Monticello Park Rehab

336 North Drive, San Antonio, TX 78201     -     $199,000.00

What's so great about Monticello Park?

First of all, the former mayor of San Antonio, Ed Garza, lives here.  I work on Broadway and Ninth St. downtown and it takes me a grand total of 4 minutes to get to my office from this neighborhood.  Monticello is a historical district which makes it very appealing to older residents of the city who want to live close to downtown but in a very prestigious area.  This is a prime area for investors to take houses that are falling apart and remodel them into something great for a home buyer who loves the area but wants something with a little bit more modern feel. I believe this property is hitting the market at $199,000 but you may want to check with the listing agent for more information at:

Misty Niemeyer
		Home Team of America Office (210) 490-8000 Direct Line (210) 831-8243

I'm a huge fan of flagstone on the exterior of houses.  I've never done it during a rehab because it's fairly expensive for my pockets but if you happen to find a house that has already had it installed you've certainly got a huge selling point.

All original hard wood floors that have be refinished, a definite plus.  Jimmy also replaced all the windows (yikes! I know that's expensive, I've had to do it) and finished the living area out with some legitimate crown molding.  

To add some counter space to the kitchen he also incorporated this movable island.  This house actually has a lot of light coming in it, despite that I took these pictures at 11 am, which allows the dark granite counter tops to really stand out against the light colors of the walls, back splash, and cabinets   

You can't see it too well in this picture but the top of the enclosure for the shower is nicely rounded.  I can't remember if it was originally like that or if Jimmy made that himself.... But either way he finished it out nicely with some good looking tile that compliments the paint of the walls and the house as a whole.  

This picture of the master bedroom gives you an idea of just how much light comes in through the larger windows that were installed.  Two pictures down you can see that these French doors lead nicely out to wooden deck.

One of the other bedrooms.

The posterior of the house.  Nice wooden deck able to host a decent sized BBQ, as all Texan's know is a requirement for a house of any size, shape, or form.  

This is perhaps one of my favorite features of the house so I'm going to spend a little time talking about it.  In Monticello as well as Monte Vista and King Williams it is very common to see a garage converted into a mother-in-law's quarters, or as I more commonly refer to it, a teenagers quarters.  The garage does house one vehicle comfortably but also has a two car car port in decent shape.  The "teenager's quarters" is one bedroom, one bath separate unit with a fully functioning kitchen.  This is perfect for house guests or relatives. This unit was actually rented out for $450 a month before Jimmy bought this house!  If you had a small family and didn't have an immediate use for this space you could easily shave a hefty portion off your mortgage OR pay for your property taxes and insurance for the year - if you bought in cash.

Ryan Harthan

210-710-1617

rharthan@gmail.com

                  

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My Latest Rehab/Flip Project

Not a flip in the classical sense...

    I've had this house forever.  It's been used as a rental, I lived in it while I was going to college at UTSA, and it was rented after that again.  Now after about eight years since it's last real rental rehab it's time to sell this guy.  What do I mean by not really a flip?  I own this one free and clear.  I was speaking to a family friend about the position I'm currently in and came to two possible conclusions.  The house is worth right around $135,000 in tip top shape.  With about $15,000 in work needed I could potentially sell for right around $80,000 on the open market to a potential investor.  So by putting an extra 15k into the house I could potentially get an additional 40k out of it (minus fees of course).  So it was a no brainer.

What did I do first?

Get bids.  I got about 15 bids before I found a contractor I liked and could do it for the right price. I had a couple jokers tell me that they anticipated their bids being around $35k.  After seeing over 400 rehabs in San Antonio I know what I should be paying.  I'm not trying to dig a moat around the house, I'm not doing distressed bamboo floors, and definitely trying to save money in the places that I can.  Second big hang up was money for financing the rehab.  I'm working with my mom and an outside party on this so it took a little time to get things sorted out.  

What all is in the rehab budget?

Tile through out the house is good.  If you're going to throw ceramic tile down I prefer to use the 18" tiles and preferably something earth toned.  Fixtures are out, door knobs out, acoustic texture on the ceiling scraped and redone into something smoother and more modern.  I'm saving money in the kitchen and bathrooms by refinishing all the cabinets instead of replacing them which turns out to be significantly cheaper while looking brand new.  I haven't decided if I want to go light or dark on the cabinets yet.  I had a girlfriend once upon a time but I've got my mom taking a look at some colors (I'm pretty sure I may be color blind).  I'm ripping out the master shower and putting in a new pan, re tiling everything with 2"x2" tiles with an accent line about eye level.  They ripped out a screened in porch on the back and I'm just going to pressure wash it and leave the patio as it looks in the demoed picture.  The garage door fell on top of me while I was over there so that needs to be replaced, turns out they're actually quite heavy.  After that some inside outside paint, new backspash in the kitchen, and granite in the kitchen and bathrooms. I'll post more updates as I get a little bit farther in the process.

-- 

Sincerely

Ryan Harthan

210-710-1617

rharthan@gmail.com

                  

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