Is shadow in­ven­tory a prob­lem for in­vestors?

The Progress-Index - At Home - - NEWS - Richard Mont­gomery gives no-non­sense real es­tate ad­vice to read­ers’ most press­ing ques­tions. He is a real es­tate in­dus­try vet­eran who has cham­pi­oned in­dus­try re­form for over a quar­ter cen­tury. Send him ques­tions at DearMonty.com.

Reader ques­tion: Where is one to in­vest in this mar­ket in­clu­sive of the banks’ shadow in­ven­tory? A good ex­am­ple is Clarksville, Ten­nessee, which ap­pears to be an ex­cel­lent op­por­tu­nity, but if you con­sider Hous­ing and Ur­ban De­vel­op­ment (HUD) un­oc­cu­pied hous­ing in­for­ma­tion, it paints a very dif­fer­ent pic­ture.

Monty’s an­swer: Un­oc­cu­pied hous­ing is a se­ri­ous prob­lem, and the melt­down in the real es­tate mar­ket from 2007 for­ward has a lin­ger­ing ef­fect on it. Be­cause there is not a stan­dard def­i­ni­tion as to what con­sti­tutes an un­oc­cu­pied home, the size of the un­oc­cu­pied home in­ven­tory is fuzzy.

Here is a glance at HUD’s over­view: “The ab­sence of uni­ver­sal def­i­ni­tions of va­cancy and aban­don­ment com­pli­cate ef­forts to as­sess the num­ber of va­cant and aban­doned prop­er­ties na­tion­ally. The best ag­gre­gate sources in­clude the U.S. Cen­sus Bureau and the U.S. Postal Ser­vice, although these are not with­out lim­i­ta­tions. Us­ing these sources, the U.S. Gov­ern­ment Ac­count­abil­ity Of­fice (GAO) re­ported in 2011 that va­cant residential units, not in­clud­ing those used sea­son­ally or by mi­grant work­ers, in­creased from 7 mil­lion in 2000 to 10 mil­lion in 2010. The Joint Cen­ter for Hous­ing Stud­ies of Har­vard Univer­sity re­ported that a sub­set of this cat­e­gory, homes va­cant and not be­ing mar­keted for sale or rent, reached a record high of 7.4 mil­lion in 2012, with in­creases con­cen­trated in the high-fore­clo­sure ar­eas of the South and West. Nearly forty per­cent of the na­tion’s va­cant homes are con­cen­trated in just 10 per­cent of all cen­sus tracts. Wayne County in Michigan and Cook County in Illi­nois, for ex­am­ple, each has more than 200 high-va­cancy neigh­bor­hoods.” For more in­for­ma­tion about is­sues with un­oc­cu­pied homes go to the fol­low­ing link: http://www.huduser.org/por­tal/pe­ri­od­i­cals/em/win­ter14/high­light1. html.

A year-old Core Logic ar­ti­cle states shadow in­ven­tory is rapidly dis­ap­pear­ing and a search of the HUD prop­erty for sale web­site for Clarksville, Ten­nessee, in­di­cates only 14 HUD prop­er­ties cur­rently for sale. It is un­clear in your ques­tion the source of the data that con­cerns you.

Re­di­rect your think­ing

In­for­ma­tion about the hous­ing mar­ket is sliced and diced and served up to con­sumers in a va­ri­ety of ways. Con­sider a dif­fer­ent ap­proach to in­vest­ing. Ev­ery com­mu­nity is unique. Whether it is ge­og­ra­phy, eco­nomic, de­mo­graphic or some­thing else, it sets each one apart. Ex­pe­ri­ence sug­gests there are in­vestors who are suc­cess­ful in most com­mu­ni­ties, and oth­ers who have not done so well.

Stud­ies, public in­for­ma­tion and sur­veys ul­ti­mately com­min­gle the num­bers to es­tab­lish av­er­ages or

me­dian sta­tis­tics. These sta­tis­tics can be help­ful in­for­ma­tion to have, but will be in­con­se­quen­tial if over­pay­ing for a prop­erty or ne­glect­ing some ba­sic lo­cal re­search. Your ques­tion is ul­ti­mately about your re­sults as an in­di­vid­ual. When com­pared to sta­tis­tics, in­di­vid­ual re­sults can be strik­ingly dif­fer­ent.

A good tool is speak­ing with busi­ness own­ers that op­er­ate in sep­a­rate, but sim­i­lar mar­kets. Re­tail type busi­nesses such as home im­prove­ment, jew­elry or swimming pools just to name a few. As an ex­am­ple, a car­pet store owner was asked about the dif­fer­ences be­tween two cities in the same re­gion. The an­swer was, “In city “A” cus­tomers pay up to $20.00 a yard for car­pet. In city “B”, $20.00 per yard is the start­ing price for car­pet­ing.” They are less than 50 miles apart.

Fo­cus on the ba­sics

Un­der­stand­ing the fun­da­men­tals of ne­go­ti­at­ing, real es­tate in­vest­ment and ap­praisal tech­niques are the most valu­able skills to­ward achiev­ing suc­cess in real es­tate. The peo­ple that pros­per have a keen eye for cre­at­ing value, re­gard­less of the de­mo­graph­ics. They ob­serve how the city is ex­pand­ing and what types of in­vest­ment a neigh­bor­hood will sup­port. They are good at lis­ten­ing to many opin­ions and boiling down to the most plau­si­ble an­swers for fu­ture out­comes from those con­ver­sa­tions. They know how to find the play­ers whose opin­ions have the most strength. Some­times they are just plain lucky.

Most real es­tate in­vestors start out small, or in part­ner­ship with an ex­pe­ri­enced in­vestor. They gather their in­sights over ex­tended pe­ri­ods of time as they be­come fa­mil­iar with prop­erty sales and the dif­fer­ences be­tween neigh­bor­hoods. Lo­cal knowl­edge is a key to un­der­stand­ing real es­tate value.

Un­der­stand­ing that one makes money in real es­tate when it is pur­chased, not when it is sold. This does not mean buy­ing for less than mar­ket value. It sim­ply means buy­ing the right prop­erty in neigh­bor­hoods where fu­ture val­ues will rise. Most cities hold good in­vest­ment op­por­tu­ni­ties. Choose the mar­kets you feel the most com­fort­able spend­ing time around.

DEAR MONTY

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