No demand for multi-unit properties either

User Forum Topic
Submitted by 4plexowner on February 25, 2006 - 7:02am

In 2001 I owned 6 multi-unit properties. From 2002 to 2004 I sold 5 of these properties (yes, I left a chunk of money on the table by selling "too soon").

Each of these properties sold quickly at full price or better. In each sale, I had the buyer's deposit money go hard after their due-diligence period (ie, their deposit comes out of escrow and into my hands and I keep the deposit whether they close escrow or not - this ensures the buyer is serious).

I've had the 6th property on the market since June of 2005. Very few lookers and no offers.

Wow! It is really shocking to see my property sit on the market after my experience with the other 5. This is a nice fourplex in a good location and it just had a $200K remodel.

Anyone interested in a nice fourplex at a ridiculous price?

Submitted by powayseller on February 25, 2006 - 7:57am.

When, and by how much, are you going to lower your price? Also, did your realtor tell you to lower the price? Just curious...your situation reflects the seller's dilemna - "should I hold tight for my ideal sales price, or lower it now to sell it?" I'm wondering how you're going to play this market. And good luck to you.

Submitted by 4plexowner on February 25, 2006 - 9:34am.

I converted the 4plex to condos.

I went on the market in June as condos. I priced too high and missed what was probably the peak of the condo market. By August the units I had comp-ed against had dropped from the high 400's to the low 400's (and were still on the market). The same units were ultimately reduced to the high 300's.

I had the condos priced in the low 400's for two months or so with some activity. Got one of them into escrow but the buyer flaked when he saw my disclosures (I assume he wanted to have the option of sueing me and my disclosures eliminated all the reasons he might have used in court).

After the condos I was comp-ing against dropped below 400K I pulled my condo listings and went on the MLS as multi-units.

I'm priced at a reasonable price based on the current market and don't intend to give the property away. My next step will be to pull the listing and rent the units.

There are so many aspects to the "keep it or sell it question". The property is currently my residence which adds another wrinkle.

One aspect that I consider is what the property will be worth after the market corrects. I'm expecting a 50-60% correction which will drop my property back to what I have in it. From that perspective all I've lost is paper equity and I've kept a low tax payment and had a nice place to live.

Another consideration is the cost of selling. By the time I sell and pay taxes I'm "giving up" about $250K of this paper equity to RE agents and IRS. (yes, I'm aware of several ways to avoid paying capital gains so save your keystrokes inre that subject)

Submitted by Bugs on February 25, 2006 - 10:33am.

There are a couple reasons that not many 2-4s have been converted to condos. First of all, 2-4s are still classfied as residential properties for mortgage purposes, meaning that owner-occupancy is still a likely factor in the purchase and income is secondary. The "residential" status afford these properties access to favorable residential lending rates on the mortgages - the difference between residential lending programs and non-residential (which includes anything other than 1-4s) is substantial. The easier and cheaper credit access has an effect on the sales prices - does that theme ring a bell? So the irony is that 4-unit properties are often priced higher than 5 and sometimes even 6 unit properties with otherwise similar attributes.

Anyways, what I'm getting to here is that in terms of maxing your profit, you would have been better off finding one of the non-residential (5+ units) projects for conversion. You make your money when you buy.

The second thing is that it's hard to imagine your profit potential as a 4-plex with the condo map being anywhere close to the retail value of the 4 units. You need to take the fact that you're living in one of the units out of the profitability equation. Selling the other 3 units at a lower retail price right now may not result in your unit being paid off (it might have if your project was 5 or 6 units), but you'll still come out of it with a nice head start.

The volume of activity for 4-plexes has dropped even more than it has for single family residences, and I see no reason for that trend to turn around any time in the near future. Unless you're selling at a price where those units can come close to a break-even on the debt service after expenses or you can find some investor who thinks they can succeed where you've failed, your property may very well just languish on the market. If the pricing for houses is levelling off or in decline, the same is going to happen with apartments, too.

Submitted by barnaby33 on February 25, 2006 - 1:37pm.

What do you mean by you make your profit when you buy? Seems counter-intuitive to me.

Josh

Submitted by Bugs on February 25, 2006 - 2:13pm.

It's an old chiche in the real estate field. You can't make a profit when you sell unless you buy well.

Submitted by 4plexowner on February 26, 2006 - 7:15am.

You nailed the primary advantage to investing in 2-4 unit properties. An investor gets the benefits of owner-occ financing along with the benefits of multi-units. That's why I ended up with 6 of 'em (and moved around a whole bunch!).

The per-unit cost of 2-4 unit properties is typically higher than it is for larger properties. At least part of this difference is because of the easier financing available for 2-4 unit properties. Once you get the 5th unit you are into commercial loans and, as I understand it, these loans typically require 35% downpayments. Since most people don't have $$$ for large downpayments, there is more demand for multi-unit in the 2-4 unit arena.

inre "...you would have been better off ...": ... and if wishes were fishes, we'd all ...

Your profit analysis is correct given the condo market in spring-summer 2005. I believe the condo market peaked in August right after I came on the market. At that point, the four condos were worth more than the 4plex but I over-priced my units.

In today's market, if I was serious about selling all four condos in a timely manner, I don't believe I would end up being ahead. Remember, I've been watching the comps for my area very closely for almost a year now.

Also, four condo sales vs one 4plex sale means 4 times the potential liability in a very litigious society.

Here's an interesting question: "what is multi-unit property worth in today's market?".

When I started buying in 1998 I was looking at bread-and-butter 4plexes priced at 9 or 10 times rents (ie, annual rents X 9 or 10). In 2000 I paid 11.5 X rents for a 4plex in Mission Beach and I thought I was paying too much. I stopped buying property when the rent multiplier started going over 14 or so because there was no way to make the numbers work. I started selling when the rent multiplier was in the high teens and low twenties. The last property I sold at 18 times rents. I'm currently on the market at about 22 X rents which reflects a premium for the condo map and the $200K remodel.

I think ultimately we will get back to rent multipliers in the 9-10 area (50-60% correction) and probably over-shoot on the way down - I will be bottom fishing anywhere below 10.

Submitted by 4plexowner on February 26, 2006 - 8:03am.

I forgot to include this point in my last post:

The condo market is currently depressed by corporations that are doing conversions and HAVE to sell their units. You've seen the sign flippers. These condos will continue to be reduced in price and the incentives offered will increase until the condos sell. These corporations have no intention of becoming landlords.

As a seller with options I am choosing not to compete with these corporations in the condo market.

As an aside: according to my loan broker, the incentives provided to condo buyers by these corporations are being hidden from the lenders - an appraiser is supposed to inform the lender of anything that materially affects the value of the transaction - for example if the property comes with a brand new car or $30K worth of other incentives - there are also laws that address how much a seller can give the buyer in the way of closing costs so the incentives being offered instead of, or in addition to, closing costs are legal in the strictest sense - any lenders/appraisers care to comment?

Submitted by Bugs on February 26, 2006 - 8:47am.

I am an appraiser, and yes, I'd like to comment. Sales concessions do affect the sale price being sold by the seller and being paid by the buyer. The appraisers are required to review the sales contract as part of the appraisal process and comment on whether it notes "any financial assistance (loan charges, sales concessions, gift or downpayment assistance,etc) to be paid by any party on behalf of the borrower." If the concessions are offered in the sales contract the appraisers are supposed to catch it. That's the way its supposed to be done.

Unfortunately the reality is sometimes a bit different. There are some situations where the appraisers aren't given the sales contracts; others where the contract is provided but is missing all of the addenda to the contracts where such concessions might be hidden; and then there are transactions where there are two contracts - one for the lender and the real contract. Even where all the information is provided there are appraisers who are willing to "overlook" that information in order to avoid bringing the appraisal in lower than the sale price.

I wouldn't place all the blame on appraisers, who after all do have to work with the information as it is provided - and there are some crafty realty agents out there. However, I will say that an appraiser who is making the effort to run this stuff down should have no trouble doing so in most cases, and to the extent appraisers aren't doing that they are failing and are contributing to the problem.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.