Texas Real Estate Inventory

Texas Real Estate Inventory

by | May 5, 2021 | Blog, Real Estate

Texas Real Estate Inventory (or lack thereof)

While most of us have spent the past year thinking about other aspects of life, Texas real estate investors have wondered what the market was going to look like when everything returns to normal. A year ago at this time we saw demand increase while supply levels dropped. Most experienced investors were surprised by what they were seeing, and anyone new to the business probably didn’t understand that this was not a normal market.

 

The Latest Numbers

Real estate professionals will tell you that a six-month supply of houses on the market is considered healthy and balanced. As of March 2021, available inventory was 1.5 months in Texas. Inventory levels at both the wholesale level and retail level are at historic lows, and the days on market for anything retail is averaging less than 30 days across major markets in Texas. This is causing prices to not only remain high but also to continue increasing. Most investors that are finding deals are going outside their respective metropolitan area and into tertiary markets. So what does this mean for the housing market and deal flow for investors, and when is this going to change? 

 

Inventory Factors

There are two factors worth considering that may increase inventory levels for investors, as well as retail buyers, but to what extent is still to be determined. First, the number of homeowners in Texas that are behind on their mortgage payments as of March 2021 is 8%. Of this percentage, 13% believed that their chances of being foreclosed on were ‘somewhat likely’ in the next two months, according to Texas Housing Insight. While they didn’t give an exact number of how many mortgages this would be (this was a U.S. Census Bureau survey of some undisclosed number), these percentages most likely represent a large number of people just given the size of the Texas housing market. 

Will there be any foreclosures in the near term? As of the date of this article, there is still a foreclosure and eviction moratorium in place through the end of June 2021. However, a federal judge recently ruled that this was unconstitutional, and the case will most likely go to the Supreme Court. The process to get there might be accelerated, as the impact of this on lenders, and the mortgage-backed securities behind all of these mortgages, is significant.

The second factor is the snowstorm that devastated Texas in February, resulting in billions of dollars in damages. Roughly 4.5M homes were without power, some for several days. While not every one of these homes experienced issues from pipe bursts, hundreds of thousands of homes were affected. Due to the record number of claims being processed by the insurance carriers, many of these homeowners have not received a check for their damages yet, let alone repaired all the damage they suffered. This may be due to the overwhelming cost to repair, and the fact that demand for contractors has outstripped supply. Many of these owners cannot afford to pay for their mortgage and pay for a temporary place to live. Others will not be able to afford repairs even after an insurance check is cut. Both circumstances may result in an owner’s decision to sell out of necessity.

 

Timeframe and Possibilities

So what’s going to happen and when? I don’t have a crystal ball, but I do think there will be some foreclosures that take place in the second half of the year, possibly in the fourth quarter of 2021 or maybe in the first quarter of 2022. If/when this happens, there will probably still be a tremendous amount of demand for housing. Coupled with very low mortgage rates that will likely be available and the continued influx of new residents from other states, those houses will quickly get absorbed in the market. Many homeowners that were victims from the storm might take their insurance check, not make the repairs, and move somewhere else, if they can find a place to go.

Intervention

No one wants to see anyone be foreclosed or have to move from their home due to costly repairs. While the latter will not be protected by the federal government, the feds could intervene and prevent foreclosures by mandating adjustments to mortgages (i.e., through forbearance agreements, loan modifications, extensions, etc.) thereby limiting an increase in inventory levels, and keeping the supply low.

Moving Forward

This is the type of market that can scare some real estate investors if they aren’t patient, not diversified, and/or have limited experience. If you are a wholesaler or flipper, it’s challenging to find deals. However, the rental property owners I know are having success. They are cash flowing better because rents have increased, and they have been able to get financing at record low interest rates. 

As I have stated many times and written about in my book, Easier Than You Think, An Expert’s Guide to Single Family Real Estate Investing, you need to be able to implement all investing strategies (i.e., wholesaling, renting, and flipping), to be successful in this business and not walk away from a deal. Bouncing in and out of industries as the market changes, won’t lead to long-term success. Staying focused with a plan is the best course of action.

 

Get Ready to Protest Your Property Taxes

Get Ready to Protest Your Property Taxes

by | Apr 1, 2020 | Blog, Uncategorized

Over the past several years, the appraisal review boards have been raising assessed values across the state of Texas, with the major markets being hit hardest. I want to help you save some money, and be ready to protest as the window of opportunity is rapidly approaching. 

My clients, friends, and associates know that, over the years, I have devoted time not only to protesting my taxes, but also teaching others how to protest their taxes. Since the protest season is right around the corner (May timeframe), let’s dive right in with an example and what to do.

Say you purchased a property that has a current county tax-assessed value of $200,000, with a tax rate of 2.67%. This would mean your annual tax amount would be $5,340. If you purchased this property for $100,000 because it needed a significant rehab, shouldn’t the tax-assessed value reflect the property in its purchased condition?  Of course it should, but in most cases it will not. Why? Most property owners do not protest their property taxes, and if you bought this property off-market, the appraisal district isn’t going to know what you paid for the property, let alone the condition.

If you protested the property taxes in this example, and reduced the tax-assessed value to the purchase price of $100,000, you would now have a tax amount of only $2,670, or one half the current tax amount. 

Let’s say the market rent for this house is $2,000/month. The principal and interest payments are $852/month (based on a loan amount of $150,000, interest rate of 5.5%, on a 30 year note), and insurance of $100/month ($1,200 per year). Your positive cash flow before protesting would be $603. After protesting, your cash flow increases to $825.50. This additional $222.50/month is a 37% increase!

Conversely, if you are flipping this house, and it takes you six months to get it sold, your savings on the tax credit you give the borrower would be $1,335. While that doesn’t seem like a lot of money, every dollar counts when you’re flipping a house. For a couple of hours work, you can decide if it’s worth the effort to protest.

Steps to Protesting

The first step in protesting your property taxes is to find the appraisal district website for the county where your property is located. For example, if your property is in Dallas County, go to www.dallascad.org. Once you are there, look for the menu, or search the site for tax protest guidelines. Many districts allow protest filing to be submitted online. However, each appraisal district has their own protest time window for when you can protest, along with their own procedures, and how the process works. All of it is quite simple and doesn’t consume a lot of time. Just follow the steps and you’ll be on your way to saving money.

Whether you protest online, by mail, or in person, be prepared to have the following four items ready to make your case:

1) Settlement Statement from closing. This shows the appraiser what you paid for the property. A copy is fine as they do not need your original.

2) Photos of the property that the appraiser can keep for their file. You will want to use pre-rehab photos. The uglier, the better. This illustrates why you were able to purchase at such a low price (“Mr. Appraiser, this property was a disaster when I bought it. Just look at these photos….”)

3) Estimates of work to be performed. This shows the amount of work needed to get the property in livable condition. If you have this documentation, it helps prove your case.

4) Sold Comparables (comps) in the subject’s area. You need these for a current understanding of the market in your subject’s area. The tax appraiser will certainly be looking at them online, when making a decision on your value. However, they will not be weighted as heavily as the other items if your property needed significant work. If you are not familiar with how to get effective comps, you need to get with a realtor or appraiser to help you. 

After you file your protest, you will be sent a notice with a date and time for your ARB hearing. Prior to this hearing date, you will want to make an appointment for an informal review with a staff appraiser. This can be arranged by phone or going to the appraisal district in person.

At your protest appointment, your objective should be to get the tax assessed value lowered to the purchase price of the property. If the property needed significant work, the purchase price is justifiable for the new assessed value. My advice is don’t talk too much. Less is more in these situations, and the appraiser already knows why you are there. Merely stating that you want the value lowered to a specific amount due to condition, should suffice. Submitting your settlement statement, ugly photos and estimates of work to be performed, will illustrate that you are prepared and will provide appropriate data to make your case. The appraiser, in most cases, will lower the value, maybe not to the purchase price, but to some lower assessed value.

My advice is take what you can get. However, if you are not happy and feel that you were not treated fairly, you can refuse to sign the adjusted value form, and take your case to the Appraisal Review Board (ARB) at the scheduled time you received on your protest acknowledgement. This is a separate in-person hearing with ARB members, and the district website will explain the process for doing this. I’ve had success at an ARB hearing. They can be worth your time, if the savings are significant.

If you hold the property as a rental, you need to repeat these steps each year.  You won’t be able to get the value down to the purchase price again though, so you will need to use your realtor or appraiser to figure out what the new comps are that year and be prepared to state the new value you are looking for instead of providing a settlement statement.

As real estate investors, we want the maximum return we can get from each property. I would highly encourage you to protest every property you purchase, including properties you are going to flip where the numbers and timeframes make sense. Even protesting just one property can make a huge difference in your returns. If you have multiple properties the savings can literally be thousands of dollars.

Finding Wholesale Deals Part 3 – Direct Mail

by | Mar 6, 2019 | Blog

Over time, the deals I have purchased with the most equity came from a direct-mail campaign. I could go on and on again here, but instead, let me give you a few quick examples:

Example #1: I once bought a deal for $100 that was worth $85,000. It needed $40,000 in work. With $45,000 in equity and $850/mo in rent, it was a great deal with multiple investing strategies available (could be wholesaled, retailed, or rented). I still have it as a rental.

Example #2: I bought another deal worth $190,000 for $56,000. It needed $63,000 in work. With $71,000 in equity, it made for an amazing deal. I sold it at full market price after I cash flowed it for a few years.

Example #3: I purchased a house for $13,000 that needed $48,000 in work. ARV was $125,000. I cash flowed this property for several years and then sold it for a nice profit.

There are books written on direct mail marketing. Therefore, the purpose of this blog is to illustrate the power of direct-mail campaigns, along with a high-level overview of how they work, and what it takes to have success with them. As you can see from the examples above, direct mail can be an extremely effective tool.

But, it’s important to note, that it’s also a time consuming and expensive method for finding deals. If you decide to execute a campaign, you will need to budget for the cost and make sure you can follow it through to the end. The goal here is to send enough mail, to generate enough call volume, to produce qualified leads that can be contracted.

Direct-Mail Campaigns

As it sounds, a direct-mail campaign involves sending letters and/or postcards in the mail directly to prospective sellers. You might think sending something just to say “We Buy Houses” is a waste of time because no one reads “junk mail,” right? Well, not everyone throws it in the trash. There is something about holding a physical letter or postcard that makes it personal and gets a seller’s attention. Some people do read such cards and will call you, at which point you will need to qualify the opportunity.

Consistency is the Key 

Direct mail requires consistency. It cannot be emphasized enough here that without consistency, you will NOT have ongoing success with direct mail. This means having a series of organized mailers intended to drive call volume from qualified sellers where deals can be made. Remember, it’s not a one-time event.

Before you can send any mail, you will need to get your list from a reliable source. Creating lists from tax records, MLS records, or simply buying lists from other service providers, is where you want to start. Once you have the list, you will need to narrow your criteria for what you are targeting (i.e., owned home for 20 years, specific square footage, year built, etc.).

The most effective way to implement a direct-mail campaign is to mail to the same group multiple times (four to five times) with a different message each time. For example, you might take a list of 5,000 (or any manageable number where you can handle the call volume) and set up a letter/postcard to go out every four to six weeks over the course of five to seven months.

Answer the Phone

Once your campaign is underway and mail is out the door, your phone is going to ring. Be sure your phone is charged and you are prepared to take the calls. Failure to be prepared here is going to cost you leads. Have a call sheet available with questions centered on determining the two most important things: The amount of equity in the property and the amount of motivation in the seller. If you have both equity and motivation, that’s a recipe for a great deal.

Conclusion

You will need to determine what your budget will allow in a direct mail campaign, as you will have better results with a larger volume of mailers. If you don’t have several thousand dollars to invest or the time needed to complete a five-month campaign, utilize the other methods such as driving neighborhoods and getting referrals.

 

 

Finding Wholesale Deals Part 2 – Getting Referrals

by | Feb 26, 2019 | Blog

Getting deals through referrals can be less complicated and deliver some of the best equity deals you will find. Think about this for a minute: how many things have you received from a referral? You may have found your job through a referral, your clients through referral, or maybe even met your spouse through a referral. So many things in life come from referrals—house deals are no different.

Deals Are Closer Than You Think

Over time, I have encouraged investors to utilize all of the resources available to them when finding deals, and one of the most effective ways, again and again, has been through referrals. So, tell the people in your network that you are looking for a distressed house to buy.

I have had clients find deals in the strangest ways, from their dentist’s mother-in-law to their barber, from having a drink next to someone at a bar, to a Facebook referral. A deal I found a while back came from my exterminator. He was treating my house, knew what I was looking for, and turned me on to a great deal. I could go on and on, but you get my point. Try this for yourself and see what results you get.

Talk to Neighbors 

You will find that as you are working on a house (i.e., performing the rehab/remodel), neighbors may stop by to see what’s happening. I have had several clients of mine find deals on the same street because someone came by and said that they would like to sell their house as well.

Also, there are neighbors who will stop by and walk around inside while work is being done. It’s natural. Don’t get frustrated or upset because you think they are being nosy or trespassing. They may be the person on the street who knows everything that is going on in the neighborhood, and you absolutely want to get to know them. They can check on the house for you when your contractors are not there. They can offer you insight into the history of the neighborhood if they have lived there for a long time. But most importantly, they can tell you who else might be in a situation where they need to sell. This type of neighbor knows those around them and their personal situations. Maybe there is someone getting divorced, moving into a senior center, or had a death in the family. All of these situations can create an opportunity for you as a real estate investor. Take advantage and be proactive. Ask them if they know about any houses that might be worth a knock on the door or other forms of contact.

Conclusion

Imagine you tell people you are looking for a distressed house to buy and nothing more. If they know someone needing to get out of their situation, have them give you a call. Or, better yet, get their number and see if you can contact them after a warm introduction. There are many ways to find referrals and make them work. The potential for great deals is right in front of you.

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If you are in the Real Estate business looking for a Hard Money Lender in Houston, contact our Houston office today!

Finding Deals Part 1 – Driving Neighborhoods

by | Feb 19, 2019 | Blog

Absolutely one of the most underrated methods for buying direct is driving neighborhoods, also known as Driving For Dollars. The reason this can be so effective is that it lets you target the situation/opportunity before anyone else does.

One of the best stories I know is from a client of mine who drove his neighborhood and found a vacant house that looked like it needed a lot of work. He sent a letter to the owner, and after some negotiating, purchased a $279,000 house for $125,000. It needed $65,000 in work. You don’t need a calculator to know this is an incredible deal. The numbers speak for themselves.

How to Drive a Neighborhood 

The best way to do this is to just drive around your target area where you want to buy real estate deals and look for the ugliest houses. They will be easy to spot because they will have one or more of the following:

  • Tall grass and weeds
  • Peeling paint
  • All the lights off all the time
  • Trash or furniture in the yard
  • Uncollected newspapers or mail
  • Or just a general look of vacancy

In the story just mentioned about my client who found the $279,000 house for $125,000, there was furniture on the curb set for bulk trash pickup. If you see one of these houses, do the following as soon as you can:

  1. Find the owner of the record. This is easy to do online either through the tax roll data for the county or some other public records source.
  2. Talk to the neighbors and find out what’s going on with the house. They don’t need to know what you are trying to do. You’d be surprised how many will tell you everything you need to know including how to contact the owner.
  3. Send the owner a letter saying you are interested in buying the house and can close quickly or try to find their phone number and contact them.

Does this sound like a lot of work? Not when you consider it could be worth $67,000 in net profit like what our client made. Set a goal to drive your targeted neighborhood each week for the next 12 months and repeat the above steps 1–3.  Then stay tuned for part two on Getting Referrals.

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If you are a Real Estate investor looking for Hard Money lenders in the Houston area, contact us today!

Why Price-Per-Square-Foot Gets Investors Into Trouble?

by | Feb 13, 2019 | Blog

One thing that confuses new and seasoned investors is taking the price-per-square-foot approach to determining the value. What does this mean? Let’s take a look at the following comps and analyze them:

  • House #1 has 1500 square feet and sold for $145,000 or $96.67/square foot
  • House #2 has 1800 square feet and sold for $150,000 or $83.33/square foot
  • House #3 has 1600 square feet and sold for $147,000 or $91.88/square foot
  • The subject property has 2200 square feet so the ARV should be $199,381, correct?

This is absolutely not correct! How did this happen? This happened because the investor took the selling price and divided it by the gross living area. So in this example, they took the three price-per-square-foot values above and added them together to get $271.88. Then they divided that number by three to get $90.63, which is the average price-per-square-foot of the three comps. When you multiply $90.63 times 2200 you get $199,381. Mathematically, this seems to make sense; however, this is one of the biggest mistakes you can make, and sadly, it happens all the time.

The reason you don’t want to do this is the methodology is flawed. According to Ohio appraiser Mike Armentrout who wrote an article titled “The Reality of Price Per Square Foot”:

“The primary fault with $/SF is that it encompasses every feature of the property and not just gross living area. Only calculating the relationship between size and sales price ignores all the considerations a potential buyer may make. If we were comparing two properties that were identical with the exception of size, then it is rational that the larger of the two may sell for more and thus the $/SF could be an accurate indicator. On the other hand, if we had two identical homes in terms of size but one had a larger wooded lot and sold for more, the equation would not be as reliable. As properties have more dissimilar amenities and features, the less reliable it becomes a function of indicating value. This is simply because other factors are not directly related to the gross living area.” 

I couldn’t agree more with this quote. Also, given a specific market, higher square footage homes generally sell for a lower $/sqft and lower square footage homes sell for a higher $/sqft. Ask yourself the following question: would you pay 33% more (or $50,000 more in the above example) to get 400 additional square feet of living space? Of course, you wouldn’t. Neither would a market buyer. In fact, if there were a buyer like this for some crazy reason, the property would not appraise as the buyer might expect, because there is probably no justification for value this high.

Keep these things in mind when you are evaluating a property. If you need help, just contact us and we will guide you through it. For more detailed information about determining the ARV of a house, read my blog The 12 Steps to Determining the ARV.  And don’t forget oddities like garage conversions! Check out this blog here to determine how they can affect the ARV.