Tuesday, October 23, 2007

Location and Price in Real Estate

I have been watching real estate flip shows over the last few months while sitting in limbo waiting for my properties to sell. "Flip this House", "Flip That House" and "Property Ladder" have been standard fare on Saturday night. "Property Ladder" is the most amusing as it usually highlights clueless people who, given the advice of a professional, learn some hard lessons. Despite their mistakes and ignoring the expert advice many make lots of money. Which highlights the most important lesson in real estate - location can overcome ineptness, ignorance and stupidity much of the time. None of the shows I watch feature homes in Buffalo. The houses are always located in a thriving metropolises of CA, TX, SC or CT.

Which brings me face to face with why my rehab is not selling. This is a beautiful home that has everyone who enters it exclaiming how wonderful it is. It's located in a great neighborhood of well kept homes. I've not heard a negative comment yet about the house itself. But there are two comments people make - "too expensive!" or "taxes are too high!" We started out at at a price of $219k and are now down to $199k but one comment we still get is "taxes are too high" (taxes are $7800). Now this is a house that has 2800 sq ft of living space and at $199k is selling at only $71 per sq ft. It's assessed value is only $165k , so I guess people are thinking it will be reassessed once it is sold and taxes will go higher. Houses of similar size located in the neighborhood are all assessed the same so the possibility of getting the assessment lowered is slim to none.

Five hundred yards to the north houses are selling for over $100 per sq ft. The difference is that you cross from Cheektowaga to Amherst. Both cities border Buffalo but Amherst is known for its good schools, while Cheektowaga has schools which are not so good and rife with racial problems. Cheektowaga is where inner city blacks are moving and Amherst remains largely white.

When I had researched the house for comparables, the only house that had sold in the last 2 years of similar size and style in Cheektowaga was the one I bought (for $182k). There had been multiple sales in Amherst within 0.5 miles in the $250k-$350k range of similar homes. To the eye, the neighborhoods looked identical, but crossing the townline makes all the difference in the world.

I recently found a top notch Realtor and he told me that only 5 homes have sold for a price of over $200K in Cheektowaga last year. He blamed the taxes, but Amherst has similar taxes. So is it schools, racial composition or some other factor making Cheektowaga a bad location? One thing I have noticed is that 98% of the people viewing this home are black. It's a desirable location for blacks who want to leave Buffalo. Whites who wander into my open houses will just turn around and walk out when I tell them the house is in Cheektowaga.

But the kicker is that I have learned that there are only 785 black households in all of metropolitan Buffalo who would qualify for the loan and pay the taxes on this property. That is a very small pool of buyers. In a sense, the Realtor is right that taxes are limiting the prices of houses in Cheektowaga. But the ultimate reality is that this is a town where whites are moving out and blacks seeking to flee Buffalo are moving in. Buffalo is a poor city and the good paying union jobs are disappearing.

So what were my mistakes in buying and selling this property?
  • I did not recognize how much influence a town line made in price. Even though no one would recognize the difference between Amherst and Cheetowaga driving the neighborhood, there is a substantial difference in a buyers mind.
  • I did not realize that there was a strong racial component to this neighborhood. Over 98% of the 200 people that have visited the open houses have been black. It is possible that a white family will buy this but not likely at all. This also reduces the possibility that a relocating black family will buy this house.
  • I did not realize how limited the pool of successful blacks are in the entire Buffalo metro area. If my assessment is correct that only a black family will buy this house, that means less than 0.079% of the people in this area can afford it. To sell I will have to reduce price drastically to increase the pool of buyers or wait longer.
  • I did miss on improvements that were needed and spent ~$15k more than I had estimated. Had I used a contractor like the people in all those flip shows used I would have spent about $20k more than I did spend and would really be in the hole, so I feel only partially bad about this.

In the end though, I think it is all about location. Location influences the pool of buyers. There aren't many buyers in Buffalo able to spent the outrageous prices for home as seen on the flip shows near big cities. In my case, the demographics are working against me.


-=LRK=- said...

Now your getting it. The neighborhood is attracting black people. It also means they likely can't afford to buy it, and you can't afford to give it away. So what do you do? I would suggest the same thing you did when you bought it, and narrow in on your target audience.

What do you find black families that need housing? This means that things like list on CraigsList probaly won't work, they won't be looking there. Where WILL they be looking? Newspaper. Where in the paper? Rentals. Do you want to rent? Hell no, BUT you have just targeted the likely audience. You could also think more like they would. Where do they go? Supermarket, Daycare and schools.

This also brings up the point of there being any colleges in the area? Maybe you can target them as well. Find a buyer student and have him rent to his friends and make a profit for himself.

But first, list it as a rental, to draw them in. How much do you want to sell for, times that by .007338 (for 8% interest) then add taxes and insurance. Basically, you just figured out what a buyers PITI would be. Now, try and list the property as close to that as possible. If it's a student, divide that total by the number of bedrooms... then list that.

Basically, once you get people through the door (much easier to find renters), then once you find people that actually want to rent it, you pitch the old 'Why rent it when you can buy it for the same money?' Put THAT idea into their heads. Tell them how even with a down market, it will come back in 3 -5 years when they want to sell it themselves.

At this point, you can throw seller concessions at them and whatever it takes. You can even sign them under a 1 year lease, get them in the door, and instead of security, tell them it's an option to buy. What happens here is, even if they default in the end, they will likely not have trashed the place too much (they think they will own it), and you keep the option.

Whatever.... just a long winded version of my own plans next time the place falls vacant... right after the expected Christmas fires from faulty lights that I am hoping for. Seriously, insurance companies always pay on time, large premiums for a 'temporary' situation (that just keeps going), and large securities to cover any damage. The tenants also have the mentality of homeowners, rather than renters. You can also charge them for water bills and whatever else you want, they just pay it.

-=LRK=- said...

Oh yeah, I wanted to ask you. Back whenever you mentioned staging and black vs. white staging. Did you do any follow up about that? If you posted an answer, I must have missed it. I too was wondering if going into Ikea and buying $2000 worth of stuff would help or not. Upon looking in the catalog, I found I can buy (likely uncomfortable) inexpensive furniture.

-=LRK=- said...

I also wondered about that Prosper loan. Do you still pay them that $200/mo or did you never bother? I thought about getting a 10k loan and buying with that.

Paul said...

Thanks again for your advice. How I found out how many blacks qualify for PITI is that I bought a mailing list. I've already sent post cards to all 785 people on the list and hoping that some of them show up this weekend at my open houses.

Anonymous said...

I am still trying to look for a real estate course to purchase and really appreciate the comments in your blog about various courses.

While looking, I saw an article on Vena Jones-Cox's webpage that might help you in your current situation. The webpage is located at: http://www.regoddess.com/article/articles.asp
Please take a look at the sixth article from the bottom on this webpage ("What To Do When You Can’t Find a Buyer for Your Wholesale Deal").

Best of Luck!

Paul said...


Thanks for all your help and links. I really appreciate it.

Yes, I did get the Prosper Loan. I had intended to use it to secure a $500k line of credit for rehabbing, but instead have burned through it paying mortgages for my rehab.

We have staged the rehab but not to the extent that you see on the Flip this/that house shows. There is no local company that rents furniture and I did not have the cash to buy new stuff. We bought several pieces of furniture from local used furniture stores (Amvets, etc.) and garage sales. We addes some plants but did not put pictures up.

Paul said...

Anonymous - thanks for the link