As we enter a new year, I am finding myself guiding clients in this market, formulating strategies and guiding expectations. It’s no surprise that the real estate market has been difficult for the past few years and many economists are expecting more of the same for this year. But even in down markets, there is opportunity for those who know where to look.
The year ended in a flurry of activity in Chicago real estate, with many contracts being written right through the holidays. I myself worked through the holidays writing up several contracts and listings, and I know I wasn’t the only one as the office was busy even on Saturday.
So what’s going?
Well several factors have been ideal for keeping the market in several sectors busy. The low mortgage rates have been slowly bringing out buyers and investors alike coupled with overall low prices and distressed inventory. However, the distressed inventory tells more; the overall inventory has been decreasing, something which historically always occurs through the slower winter months, but with more attractive properties, going into contract and fewer homes coming to market, the selection of desirable properties for buyers are growing smaller. This spring will be essential; watching the inventory versus contracts/sold percentages.
Also the majority of investors and homeowners who were on the verge of, or considering selling their properties as a distressed asset, or being foreclosed upon probably have already done so, limiting the number of new distressed assets. The caveat are homeowners who were unable to negotiate a successful short sale with lenders and will either remain on the market with high market time, or decide upon a deed-in-lieu or stay until foreclosure finally occurs. That is not to say new short sales and REO properties aren’t coming to market.
It is also no surprise that financial institutions are backlogged with foreclosed inventory. But considering the fact many of these properties have been sitting vacant, the “ideal” purchase for some may not exist as the possibility of liens increase or the property may fall into disrepair and even vandalism.
Consider the statistics for statistics for December: inventory has dropped significantly across all residential classes and even though actual closings have slightly dropped as well, the number of contracts written has surged dramatically. Also note that because of properties under contract, the MSI for each class has dropped significantly as well from the same period the year before, but market time for each class is rather high, and in some classes, the highest for the year which reinforces the above model that desirable properties are coming to market and going into contract, leaving those that have already been sitting vacant to accumulate longer market times.
So what do you do?
Multi-units are moving incredibly. With rental rates stabilizing, or even growing in some areas, investors are picking up properties with attractive cap rates and earning attractive returns on their initial investments. Even mixed-use properties are examined where residential rental income can help stabilize the investment until a commercial tenant is found.
Seasoned investors will be able to find opportunity in high demand rental markets, especially with many Class B properties and even some Class C properties.
Many beginning and moderate investors are looking at attached housing investments where rental rates are not only stabilized but growing due to demand and location. Investors should look for associations with strong reserves, no impending capital expenditures, percentage of owner occupants and possible rental restrictions. Though the cap rates are not as high as other types of properties, these investments are attractive to beginning investors (if you do your due diligence on the association) when cost of repairs, maintenance, rental growth and risk involved are taken into account.
Commercial condos should also not be overlooked. With a high number of Class A/Class B spaces available, many being sold as REOs the vacancy could be a small concession for long term holds. Reuters just wrote an article about commercial properties in the U.S.
Sellers currently on the market or looking to sell soon should set their expectations realistically. With contracts being written on a surge from the same period the year before be prepared to enter negotiations with full knowledge of market activity, comparable properties and prices. Do not risk overpricing or buffering for possible negotiations, this will limit exposure on the market as well as trafficking in buyers. Consider the psychology of buyers out there. Would you rather price it right to attract more buyers and potentially more offers or price high, and hopefully attract that one offer you may have to work with (for better or worse). With contracts being written surging, it’s all about the odds; at least with the former, the possibility of another offer coming in is more realistic if that first offer isn’t attractive enough. The latter scenario may also prove difficult in financing if appropriate comparables cannot be located. What would you do if you were the buyer?
Chicago’s risk index earlier in 2011 has started to decrease although it will be some time until the risk index will be calculated for Q4 2011 with the last report stating Chicago-Joliet-Naperville MSA at 39.5 which is deemed moderate risk (low risk is a score of 30 and below).
Current clients will receive a detailed analysis for their related areas, in-depth market analysis and reports. Considering a real estate transaction? Feel free to contact me for consultation.