King County overvalued by 20% to 30%

[Niuska]

Recently registered on SeattleBubble, but I am an experienced real estate investor. But my experience is mostly in North Carolina, so I am new to the King County market. I recently relocated to the east side of King County for a Microsoft position. With that disclosure, here is my impression of the local market. I decided to rent for the first year because nothing makes sense in this region. I only offer this post as the perspective of someone new to the area. I am not seeking to insult anyone who happens to have a different POV.

I have been searching for sensible investment properties to find around here. Guess what.... THERE ARE NONE!!! After 6 weeks of looking, I cannot find a single investable local property that makes any financial sense to purchase.

Based on current lack of credit, even for otherwise qualified homeowners or investors, IMO prices will fall until the purchase prices meets the rental revenue potenial. That market price for real estate will be determined in part by the direction of interest rates. The higher the rates goes, the more real estate has to fall.

With the current credit crunch, there is not much available credit for investors. So only the cash buyers can really afford to look for good deals. But there really are no good deals in King County, so I think the cash is staying on the sidelines.

I made one offer on a bank owned (Countrywide/BofA) property. I spoke with a few residents in the parking lot to get an idea of the rental rates. I did the math on the property taxes, assoc fees, insurance, current interest rates, etc. Then I priced my offer to make the deal cash flow neutral. The 1 br, 1 ba condo smells bad and needs new carpet plus updating kitchen and bath merely to be rentable. So I am budgeting some money for fixing it.

The bank is still 15% too high even with their counter offer. And so far this is the closest deal I have even thought it was worth attempting. I offered a cash deal at 20% below what the bank was listing. And the bank was only listing it about 10% below another similar condo in the same complex.

In summary, I think this market is overpriced by 30% based on the expectations of regular sellers. It is overpriced by 20% with the bank owned properties. Only once the prices get serious will you see the cash come off of the sidelines.

This is just my opinion. I will keep making my offers calculated on it making financial sense. When the banks capitulate and unload their inventory to investors with cash, that is when the floor will arrive.

The days of buying a cash flow negative property, and praying for appreciation, are over.

[Niuska]

Just to clarify, even though I make cash bids, I base my calculations on the cost of money and what the price would be if I financed 80% at the current interest rates. Anything rational (for investment purposes) needs to be at least cash flow neutral assuming 80% financed at current interest rates. Just my opinion. Others may differ.

I think King County real estate is going to fall 20% to 30% just like everywhere else. Then once we get investors off of the sidelines, prices will stabalize and banks can lend based on reasonable expectations.

[Big Mike 34]

[Alan]

Niuska,

Investors here are willing to accept a lower rate of return that you are. Will that change? I have no idea.

[Niuska]

[Alan]

[Niuska]

Alan,
I agree with you on that. It will take years to get this all worked out. After most people take a pounding on a bad real estate investment (or lose $100,000 in their home) then they will be more cautious in the future.

I also take a long term approach. I am not looking to flip any houses or condos. I am looking for long term properties. But if they are all cash flow negative, that can cause them to blow up quickly. I just don't see that game working any longer in California or Seattle.

I have a friend in California who has $8 million in mortgages for his properties. I think there were 12 properties or more. He was buying in 2004, 2005 and 2006. All of them had 30 yr fixed mortgages and were rented out. On paper he was doing great. He had over $1 million in paper equity in late 2006. But they were all cash flow negative. His Oracle/Peoplesoft IT consulting company (a few contractors working for him) made him about $300,000 annually enabled him to handle the negative cashflow.

But when he called me in early 2008 to ask for credit advice, he was in trouble. Most of the properties were underwater financially. So his equity was now negative and he was cash flow negative every month.

He let most of the properties foreclose. It just didn't make any sense to keep making payments. There was no hope of the values coming back anytime soon.

This guy will be out of the market for a long time. HIs credit is trashed and he got burned mentally. It will be a long time before investors forget about these experiences.

That is why I think the prices will fall until it makes financial sense again. As always, this is merely my opinion.

[Alan]

Let me ask you a few questions.

1) Would you buy an investment today for $300k that paid back $18k annually if you thought it would sell for $250k in a year?
2) Would the answer to #1 make a difference if the investment was real estate or a stock?
3) Suppose you bought a house for $300k that returned $18k annually. Three years later you can sell the house for $700k but it is still bringing in only $18k. Do you hold on for the long term or do you sell and put your money in a different investment?

[rose-colored-coolaid]

[Robroy]

I was visiting a friend in Kentucky and was already aware that the real estate was substantially cheaper than here. But what suprised me was how close rents were to here. I would not waste time investing here. At least not now.

And come to think of it, when I sold Commercial RE in the early 80's, the common paradigm was that "of course you're getting less in rent than the debt service, taxes, etc. You're making up for it by the equity buildup over time and slow rising rents. So eventually you'll do well." It does work if you are in a "bottomed out" real-estate market, ready to begin the next slow upward cycle, but sinc we are at an apex, with a LONG way to go down, real estate doesn't seem like a wise investment. When the government is selling houses in lots of ten for pennies on the dollar as they did a few decades ago, I'll be "in".