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The conversation I want to have today is about why it makes so much sense to invest in the Sacramento Real Estate Market.

When researching a new investment area, I would recommend that you start by determining the current stage of recovery the proposed city is in and the predictions for future growth?

If you are looking at Detroit, Michigan for example... you should not solely focus on the huge drop in prices. You should really look at the cities ability and resources to "take their lumps" and get back on track.

For the last several years, Sacramento has seen home prices soar and bloat as we headed into our current economic slump.  

As many of you heard, we have had a harsh correction to our Sacramento Real Estate Market and many families lost their homes and/or rental properties over the past 4 years.

So where are we now?

Right now we are seeing inventory slowly decreasing to 35 days. This means in 35 days there will be no homes left on the market. Many sources will report that we have seen an increase in sales and purchase prices. They even report that this may be an indication that we are out of the woods.

Although all those facts are true... I am afraid it does not mean we are out of the woods yet.

There is another part of the story... 


What about the Sacramento Shadow inventory? The what?

According to Lori Mode at Keller Williams Realty...

 "Realty Trac is reporting as of 8/12/09 5220 bank owned homes in Sacramento, CA.  According to Metrolist, we currently have 1240 REO or bank owned homes either active or pending on the market in Sacramento.  It appears that this leaves a difference of 3,989 bank owned homes still to come on the market.  In addition, Realty Trac reports today a total of 5151 Preforeclosure in this same area."

Real more about the shadow inventory numbers >>

Yes we have seen an improvement in our market, but we have not seen the last of the foreclosures.

Look at the ADDITIONAL...  5151 homes currently in pre-foreclosure in our Sacramento Real Estate market!

What is pre-foreclosure?  For the purpose of these statistics... these are homes that are currently behind a minimum of 60 days and are in the process of being taken back by the bank.


This confirms 8,000 plus opportunties are right around the corner.

 

The question you need to ask yourself...Will you have all of your ducks in a row in order to take advantage... to benefit?

Well wait a minute! How do I as an out-of-town investor know if Sacramento has reached the bottom of the market when this next wave of Sacramento foreclosures hits?

Well I don't have a crystal ball , but I can share with you what I do know.

Here is a graph provided by www.credit-suisse.com and is taken from a report that inventoried all adjustable rate mortgage in the country and graphed out when they were scheduled to reset.

What does reset mean?
Most adjustable rate mortgages are fixed for a specified term when originated.  This graph plots when these mortgage will no longer have the fixed payment option and the borrowers interest rate will adjust to the current market pricing.  This new interest rate is determined by the index the loan is tied to and the margin the bank put in place when the borrower signed the loan paperwork.

According to this graph it looks like we will not see a recovery of the real estate market as a whole until 2011 and/or 2012 (when looking at the effect of potential default due to adjustable rate mortgages).

In addition to issues with reseting adjustable rate mortgages, there are several other factors that impact our Sacramento real estate market.

Factors like future job loss and increased furlough days (not just state and county workers) will continue to impact our area.

Wait a minute!... Isn't this an article about why you would want to buy in the Sacramento market!  Yes... I am getting there, but you will want to know the down side of any investment! 

The good news...

Since 2005 we have seen a decline in value of more than 68% in the Sacramento Real Estate Market. This information is based on statics provided by the Sacramento Association of Realtors. You can access the statistics by visiting their website.

I have sumarized their findings below:

Keep in mind these numbers are only factoring single family homes that were sold through our local MLS system. For-sale-by-owner sales for example, would not be reflected.
  

 

 

Please note: Looking at the median home price is not always the best measure to use, but will give you a broad overview of what our market has been doing in the last several years.

 

 

 

 

Not only have the price of single family homes decreased in value over 68% since 2005, we have now dipped to a point where Sacramento real estate is undervalued.

So what does undervalued mean?
Right now prices have dropped to the point where it is cheaper to buy a foreclosed home than it is to build it.  Our clients are having to insure their homes based on the replacement cost which is much more than what they paid for the home.

Another plus...Our rental rates have held steady (or slightly declined) for the most part in the last couple of years. It will be important that you investigate your particular target neighborhood if you wish to proceed. I will address how to research that in another post.

So the bottom has literally dropped out of the Sacramento Real Estate Market and homes are now undervalued, but the rent...for the most part... has held steady (when you compare it to the drop of our home values).

Another plus that you can not graph or predict...  is what I am calling "The Room for error factor"!

The Room for Error Factor?...

Right now all conventional loans have to go through a process to meet the new HVCC requirements. Investors have to order an appraisal through the lender's assigned third party management company. This company pools together a group of appraisers and randomly selects one for the job.  

What is happening is these appraisers in the new pool are not all qualified to give an estimate of value for the Sacramento market. A large portion of them are new to the industry in the last 6 months, they live 45 minutes away and don't understand our market, or just plain don't know what they are doing in general. 

This has reeked havoc in our area... across the country for that matter.

I will give you an example of what is happening.  The random appraiser selection process picks a total yahoo appraiser out of the hat.  This person performs the appraisal and comes up with a value that is 50k less than what the buyer has it locked up for in contract because they used comparable properties from a totally different neighborhood.  Now what?

You can choose to argue with the appraiser (through the third party management company) which is a 50-50 shot based on my experience.  Often times the Seller is forced into a position of making a choice.  Do they reduce their price by $50k and get the deal done or do they risk putting the home back on the market and running into the same value issue 60 days down the road.

The vibe I am getting from my own pipeline and other REO agents in the area... some banks are just cutting the price to get the deal done. 

So again what does that mean to you as an investor.  Lets say you have a home locked up for an already good price that will provide you with immediate cash flow.... Now you have an opportunity to get a BIG FAT DISCOUNT because someone screwed up.

Now I am not telling you to invest in Sacramento based on something that might happen. What I am saying is that this HVCC process is also contributing to our decline in value. Every time a bank drops the price to get the deal done, the next borrower who buys in that neighborhood has to use that reduced price home (because of a mistake) as a comparable property when they go to do their own appraisal.

It is happening folks!

The room for Error Factor is not just tied to the HVCC drama! IT could be an REO listing agent who is assigned a property where they did not realize the actual value of the home because they are not familiar with the area. It could be a bank who is tired of dealing with a particular property who lists the home low to finally get rid of it.

Trust me... the Room for Error Factor is huge right now in our current market!

By the time you hear about our Sacramento Real Estate market recovering in the news... it will be too late and we will have already hit the bottom.  Why?  Because they are using statics that are already several month old.

I can tell you based on the inventory of homes as of today... our Sacramento market has quickly shifted to more of a Seller's market. That may change again once the shadow inventory is released.

So I guess the thing you need to ask yourself is...

If we have seen a 68% decrease in value over the last several years ... you have to ask yourself.. how much more could it possible drop? 

That is something you will need to get your head around and is a decision you can only make for yourself.

For me..

If I can get a discount on today's prices... and the home cash flows... and does not cost me too much out of pocket... what is my downside?

As a speculator all of this can be overwhelming and fear an take over!

We investors are a different breed.  When everyone is running for cover, we can pick up deals where others could not get out of their fear mode.

Under valued real estate + cash flow + potential future appreciation +"room for error" = A REAL DEAL!

Another quick note I want to mention... There are are serious flippers in our area turning homes for a profit in today's market.  As active member in our investor community, more and more Investors are getting into the flip game. This is not something I would recommend to an out-of-town investor... but it indicates that there are are really good deals right now in Sacramento.

I hope this information helps you to further investigate Sacramento as a place you want to bring your investment dollars!

Thanks for reading my 2nd installment of my article "Why should you bring your investment dollars to Sacramento, Ca.?:.

This series will include:

• Why it makes so much sense to invest here!
• Local amenities, demographics, and local major employers
• Expectation of cash flow and purchase price
• Samples of typical Sacramento Cash Flow Deals
• How to research local rental income and vacancy rates
• Selecting your Sacramento investment team  

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This blog by:

Team Newington
Sacramento Mortgage Planners
First Priority Financial
(916) 687-6868

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The real estate market is certainly on a historic roller coaster ride.  Yes, unfortunately, there are countless folks that are being caught up in the foreclosure storm that is sweeping across the country right now, but on the flip-side, this is creating significant investing opportunities for others.

There is another wave of foreclosures coming to the Sacramento real estate market. In fact there is a wave of homes that are already owned by the bank that are just sitting there... not currently on the market. For more information about this shadow inventory read Lori Mode's recap from our Sacramento Real Estate Investor Forum at the Rental Housing Association.

The following are actions that you can do to best prepare yourself to take advantage of the current shadow foreclosure some of these upcoming opportunities in our Sacramento real estate market.

Start with the End in Mind:
Be clear on what your desired financial outcome is and work strategically backwards to your current position. Specifically, how far out into the future are your milestones and how does this compare to your current situation and available resources.

Credit:
Lenders are becoming much more risk adverse and your credit history is becoming much more important when applying for a mortgage. Do whatever you can to get your middle FICO score at 740 or higher. Other than paying your bills on time make sure to keep credit card balances at lease 25 or 50% of allowable balances.

Employment/Income Source:
Many of our clients are self-employed and/or own several Sacramento rental properties. The biggest challenge for these types of clients is their tax returns are really ugly. That is the reason why we buy investment property... right? Yes as a Sacramento Investor you want to take advantage of the ample tax benefits available for owning rental property... BUT it can hurt you when you go to apply for a mortgage. Consult your CPA BEFORE you file your next tax return and make sure you have a good strategy to deal with this. It may make sense to file an extension until your purchase or refinance transaction has been completed.

Down Payment/Reserves:

• Plan on a down payment of 20-25%, depending on your purchase price.
• Your down payment funds may need to be seasoned two months or be prepared to provide proof of where the money came from as well as a letter of explanation. 
• Plan on having 2-6 months of the subject property monthly expenses left in your accounts after close of escrow. Some lenders are requiring 6 months reserves for every property you own. It's in your best interest to maintain this even after purchase of the property to cover expenses in case you experience occupancy or maintenance challenges.
• Consider partnering or joint venturing with other parties if you need to augment your resources.

Compatibility of Loan Terms:

• Make sure your loan product is compatible with current Sacramento real estate cycle and your exit strategy. Always give yourself  room for worst case scenarios when choosing adjustable rate products and prepayment penalty terms.
• Make sure you are aware of existing loan terms so that there are no surprises in regards to your existing portfolio. In certain circumstances, especially in this declining market, it may even make sense to refinance before your rate adjusts rather than be caught in a circumstance where your options are limited. If you are unsure of these terms, contact your mortgage advisor to help you get clear.

Develop Team:
Real estate investing in Sacramento is a team sport and should be treated as a business. Make sure your current team of advisors, including but not limited to, property manager, mortgage provider, CPA, attorney, and Realtor are real estate investment savvy and preferably own real estate investment themselves. That way they are personally vested in keeping up with the latest developments.

Lastly, make sure your advisors are proactive and strategic and don't be afraid to trade up if you need to get referrals from competent advisors to fill in other gaps.

Real estate investing can be a great source of long term wealth building if done prudently. Position yourself to take advantage of the real estate opportunities in our current real estate cycle.

Happy Hunting!

This blog by:

Team Newington
Sacramento Mortgage Planners
First Priority Financial
(916) 687-6868

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