Is it a good deal or not?

Recently I was asked for my opinion about some condos going for less than half of what they were going for a year ago..I do not know the area, but condos on the beach for 177,000 seems very cheap..There are always factors to consider though, and things like HOA dues and taxes still reflecting a 450k price tag are just some of them.

Here is my answer, I hope it helps one other person that takes the time to read it.

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Dear Jason

What would be valuable to me is to know what the other distressed situations are going for down there.

While working with Mike & Jaclyn last week I did the same thing on our area here…..I was blown away to see what has happened to comps due to foreclosures, short sales and bank REOs…A home that was listed for 185, and sold in 2006 was just put on REO FULL LIST PRICE at 59,900…The reason: there are several more in the same neighborhood.

I had not seen the decline in this neighborhood value but I drove by it on a regular basis.. For the last 6 months I have been consentrating on larger commercial projects.. Again.........Knowledge is Power.

That is what a comp evaluation pricing adjustment will do for you….but its only one of the tools to consider.

The other, more important tool in this market is the rental income approach…..If we take this home they were looking at and with minor fix ups, what can we get a steady rent out of it for????…….We all agreed that it would pull at least 800. Per month…A quick rule of thumb for investment rentals is 800.00 payment per 100k…so we would take total price including repairs say =75k X 800= .75x800.= 600.00 per month PITI leaving approx 200. Per month in cash flow for reserves and profit.

In the times of declining values, we have to be very careful not to evaluate in terms of historical values. While the unit at 177k looks like a great deal, what is the real value based on either comp approach or income.. If it can be supported by cash flow on a steady basis, then it has a real value X 2.

First, it is an undervalued asset to acquire. But is it the best price..Imagine being in a situation that has an overabundance of any commodity..a trunk full of cheap new tires and no gas in the tank creates a car that still wont get you where you need to go.

But if the asset has a cash flow in excess of basic costs, then the cheap price becomes very valuable. Not only is it valuable, but it has sustaining power to keep itself alive on its own until the pricing of markets catch up again. That’s what I have learned about looking at a property.

First, is the neighborhood going up, down, or just floating in place. Second, can the income off the property sustain the investment costs. Third, will the value of the neighborhood allow your asset to appreciate in value over time so that you can sell when ever YOU wish to sell.

With the amount of inventory available, I believe we can find properties that meet all the above requirements, or just pass until we find those that do. This is true for a single unit condo or the entire building. The rules of cash flow don't change as the project get bigger.

Mike Norvell Sr.

Developers Capital Realty, LLC

Office (352) 365-6464

Fax (352) 365-6556

Cell (352) 408-7111