Adam Writes: To compensate for longer transaction times and declining ARVs. Are investors offering less on their percentage when making offers and how much less is it?
This was a great question from Adam.
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Tim Herriage ([00:17]):
Welcome back to real investing. I’m Tim Herriage. Thank you for coming back today. Adam writes to compensate for longer transaction times and declining ARVs our investors offering less on their percentage when making offers. And if so, how much less is it? Great question, Adam. Um, personally, back in April, my acquisitions company was directed to reduce their LTVs that they were offering, uh, percent of the after repaired value minus repairs by 5%. And we’re seeing that that’s okay. So basically we went from paying 80% of the estimated value minus repairs to paying 75% of the value minus repairs. And we’re seeing, yeah, I would say private margins are down, but, uh, volumes staying in the acceptable range. I wouldn’t say it’s necessarily staying the same, but it’s, it’s definitely staying in the acceptable range. So, uh, yeah, I think as if you’ve followed me much, you know, that I’ve been through some bad financial times in this industry and I’ve weathered those storms.
Tim Herriage ([01:29]):
And I like to think I’ve learned from my mistakes. So where I’m at is reduced risk, kind of a risk off environment. Wait, let this next federal reserve meeting, which is tomorrow happen, see where they go with interest rates. Ultimately the fed interest rates are not, what’s really hurting the mortgage interest rates as much as the investor demand the investor demand on the, you know, when I say investor, I don’t mean the real estate investor. The people that normally buy the bonds that pay for the 30 year mortgages have just dialed it back as well. It’s just like the big hedge funds. So what we’re seeing is reduced interest. What we’re seeing is if you think rates are gonna go up, you know, a hundred basis points in the next 60 days, why would you buy 5% paper when you can wait 60 days and buy six?
Tim Herriage ([02:25]):
And so part of the way the federal reserve is trying to control inflation is through a concept known as demand destruction, right? So they just have to slow the economy down. And the way you slow the economy down is by reducing demand. And you reduce demand by raising interest prices and making it less affordable to finance things, houses, cars, uh, credit card payments. So I think we’re in an interesting cycle. I still do not foresee it to go much beyond the next, you know, couple months I feel like number one, our Fed’s really political, but number two, if you, I, I just feel like we had a reset. I feel like in 2020, everything shut down, this is not a political statement. It’s just a ma matter of fact, and people got paid to not go to work and then some people found other ways to work.
Tim Herriage ([03:20]):
I think that one thing that’s not been quantified yet in our new economy, if you will, is the effect of gig gig working. So, um, I don’t wanna get off topic, but what I’m seeing is yes, investors are offering less on homes and I’m seeing somewhere between five and 10%, there’s some markets like San Diego. There’s some, uh, less traditional markets like Boise, Idaho. There’s some mountain home, uh, markets like evergreen, Colorado that it’s probably 10 to 15% less. So I think what you’ll see is it it’s gonna be market dependent. So if you’re in a solid submarket where you are getting good 90 day comps and there’s demand for real estate, and there’s a solid job market, you may not want to reduce your percentages much, much at all, because we’re still seeing a lot of those markets going at or above asking price, as long as it’s a real asking price.
Tim Herriage ([04:23]):
So many of these asking prices, people are talking about the price reductions and everything. So many these asking prices are not real. They’re not based in comps. I have yet to see any property. And I will just say in Dallas Fort worth that had three good average comp three good comps over the last 90 days that were comparable to the subject property that didn’t sell at or above list. So I think you continue to watch for seller paid closing cost and you continue to watch for, uh, it’s kind of the 90 day average dollar per square foot on sold properties. And then you run your math on that. So, you know, the last two years it’s been find the highest comp in the last 12 months within a mile in add 10%. And now we’re getting back to the real math of take the subdivision three recent sold comps.
Tim Herriage ([05:11]):
And right now, I mean, personally, I’m going 90 days, I will go back six months if it’s a really solid neighborhood. And then I’m looking at the active versus the sold, right? If I start seeing in the last 90 days, call it three active properties in one sold property in one pending property. Well, that’s not very good, you know, from an absorption rate standpoint. But if I go back and look at it and I see one active property in five sold properties in the last 90 days, that paints all the picture I need to see. So hope that was helpful. Thanks for riding in Adam. If you’ve got questions, hop to, I have lunch, money.com, submit your questions and we’ll see you tomorrow.
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