Covington, GA

Here’s a summary of what’s happening in the Covington and Newton County real estate market as of the end of July, 2009:

Homes in Covington and Newton County newly listed on the Georgia Multiple Listing Service during July totaled 246, down 34.9% from the same period last year. However, pending sales in July were up by 32.8% over a year ago. The reason is three-fold… July is historically a good selling season as families try to get resettled before school reopens, home prices remain depressed as opposed to last year, and mortgage interest rates remain low.

The average sales price of a home in our area in July was $113,323, down 17.5% from July 2008.

There remains a 9.3 month supply of homes for sale in Covington and Newton County. We’re getting better, but a 6 month or lower supply is generally considered by Realtors® to be a “normal” market. The absorption rate, or how long it should take to sell the number of homes available in a particular price range, stretches from a low 3.6 month supply in the $0 - $100,000 price range, to a 44.6 month supply of homes priced between $225,000 and $250,000, to a whopping 53.6 month supply in the range between $450,000 and $500,000.

New foreclosures coming on the market continues to be one of the largest problems in our local real estate market. Even though sales of homes have improved recently, the numbers of foreclosed homes continues to add to our existing inventory and keep home prices depressed. Today’s "Covington News" legal section contained 32 pages of new foreclosures coming onto the market… not an unusual occurrence.

There were 54 foreclosed homes which arrived on the market in July, bringing our yearly total for 2009 to 476. Unfortunately, that keeps us about on track with 2008, during which we saw 790 foreclosures in the County. Newton County was cited last week in the "AJC" as having one of the highest foreclosure rates in the state. Unfortunately, that statistic does not seem to be abating.

Although we can’t compare Newton to our surrounding counties due to different urban and rural characteristics, population concentrations, median incomes, etc., it’s still interesting to note that Butts County had 7 foreclosures in July and 54 for the year to date, Henry County had 144 for the month and 884 year-to-date, Jasper County had 1 and 15, Morgan County 6 and 21, Rockdale County 46 and 318, and Walton County 51 foreclosures in July and 316 for 2009 thus far.

If you have questions or comments, or would like more detailed information on the real estate market in Covington and Newton County Georgia, just let me know.

This is not about Petula Clark’s great 1966 hit record, but rather an item on the 11Alive evening news broadcast last night which caught my attention…

A lady in Coweta County received a letter in the mail soliciting her participation as a “Mystery Shopper.” All she had to do was cash the enclosed check and complete a paid shopping and evaluation assignment within a week of her acceptance.

Now, this ain’t rocket science, people. I know a couple of real “mystery shoppers,” and it’s an easy, legal way to pick up some extra pocket change… especially if you love shopping. But the rub for the lady in Coweta County was that her letter… and check… were totally bogus. She realized that a few days later when the bank contacted her and wanted their money back. Cashing a bogus check for such a large amount was a felony, and she could go directly to jail without passing “GO!”

What caught my attention, however, was that I got an identical letter at my office address last week.

Sandra Stoke, Marketing Director of QuickFact Consumer Research in Calgary, Canada, offered me the opportunity to earn additional income as a “Customer Services Evaluator” in her company’s “fully paid program.” And if I became “one of the select few to distinguish myself in the course of this program,” my job would become a “permanent part time position” paying me up to $150 per hour. Heck, I can be pretty damned distinguished for that kind of money! Here’s all Sandra wanted me to do:

• Cash the $2500 check

• Buy $50-worth of stuff at Wal-Mart (which I could keep), and evaluate their service

• Buy $50-worth of stuff at Gap (which I could keep), and evaluate their service

• Pocket my $300 training pay, and

• Evaluate the “effectiveness and efficiency” of Western Union’s Money Gram service by wiring the remaining money to my (unnamed) “assignment coordinator.”

So, let’s see…. I get $300 cash, $100-worth of Wal-Mart and Gap crap, and a permanent part time position paying me 150 bucks an hour! (No doubt in my mind that I could “distinguish myself.”) Wow! What have I got to loose? …. $2,500 hard-earned dollars, court costs, and 2 to 5 in the Newton County Detention Center!

Beware people! If you hear from Sandra, don’t sign up, and don’t cash that check. I don’t want to wave to you - mowing grass on the Covington Square in your orange jumpsuit - as I drive by. It’s just another scam, and in today’s economy, an unfortunate sign of the times.

In today’s Covington real estate market, I’ve ceased being amazed at the attitude of the FDIC, some of our large banks, and alleged premiere mortgage companies. They are continuing to do more to hamper a rapid recovery of our housing industry than they are to facilitate it. And, they don’t really seem to care.

There are exceptions, naturally. But, they are few.

Several of our “local” banks, strapped with significant numbers of foreclosures, are making genuine efforts to reduce their inventory and bring things back to a more normalized market. They have assigned special management teams to work on getting the foreclosed homes off their books. They’re advertising, offering special agent incentives, good interest rates and special financing packages to qualified buyers. Most importantly, they always are available to talk with agents. But, the “big guys” are another story…

In the past couple of weeks, my associates and I have been involved in two situations which have become all too typical. One involves the FDIC, and the other a large bank/mortgage provider, who shall go unnamed. I won’t even disclose the names of the horses which pull their stagecoach.

In the first situation, a local bank foreclosed on a number of new homes in an upscale Covington neighborhood and was making every effort to sell the homes. In fact, they had several under contract when the FDIC stepped in and assumed control of the others. My associate had a qualified, pre-approved buyer who had found one of the remaining homes to be their “dream.” But when the agent called the local bank to present her offer, she was told that the FDIC had assumed control of the remaining homes, there was no one she could talk to at the FDIC to make an offer, and even if she called and left messages, no one would call her back. “The FDIC has its own procedures for dealing with its inventory,” she was told, “and don’t seem to be in a hurry.” The homes may be re-listed with an agent in four to six months, but until that time, there’s nothing you can do.” The result… a confused, frustrated, inconvenienced buyer, a frustrated Realtor®, and another new home remaining in inventory, deteriorating, blighting the neighborhood and ready to be vandalized.

In the second situation, my associate made an offer on a foreclosed home listed for $256,000. Her buyer's offer of $205,000 was the highest of three which came in at essentially the same time. However, several days later, the listing agent called to tell her that the asset manager for the mortgage company which owned the home had decided they would get more for it by selling it at auction. Last weekend, my associate bought the home for her client at absolute auction for $140,000. My associate had a very happy, satisfied client, but she got paid much less than her effort was worth. And, I hope the asset manager got thrown from the stagecoach. He probably didn't...

But, I’ve ceased to be amazed!

Think that cute little 3BR/2BA brick and siding foreclosure across town might be a good rental property? It
may be… Home prices are at a real low. The supply seems almost unlimited. Interest rates are the lowest
in years, and more and more people are looking for rentals every day.

Even today – with the stock market down over 52% from its record high in October 2007 - a home is still a
safe and highly leveraged asset with an ability to generate wealth which is second to none. But before you
cash out your mutual funds or dig up that coffee can full of cash in the backyard to become a real estate
investor, there are few things to consider.

Compare the Numbers - When you buy investment real estate, you’re not just buying bricks and mortar,
green shag carpet and pink bathroom tile at a great foreclosure price. You’re buying a “Money Machine.” It’s not the house, or duplex, or shopping center itself you’re buying. It’s what you can get out of it. The “Net Operating Income” is actually what’s for sale.

Real estate investors buy property based on “numbers” - not number of bedrooms, but financial analyses of a single property, or of that property in relation to others available. Don't base your purchase decisions on “price” alone. Unless you're paying all cash – which, normally, you shouldn't do – price is just a function ofthe loan terms.

The 3-legged Stool – The basis for considering the purchase of an investment property is like a 3-legged stool. The decision should be based on income, expenses, and financing. The key to your success in purchasing a “money machine” property is to combine these three legs – income, expense, and financing – into a package that makes financial sense. Unless the stool has all three of its legs, it can't stand. It will tip over, and you will fall off!

Leg 1 – Income - Pricing investment real estate is an art. There may not be a totally right or wrong
method. But, unfortunately, some investors don't have any method! An easy rule of thumb to forecast a
property's value is the Gross Multiplier. Many investors use this method alone tp determine what they
should pay for investment property based on it's potential income. The Gross Multiplier is the total rental
income you could realize from a building if it were 100% leased. It considers the monthly rental income in
relation to the sales price of the property. You might hear investors say, “I'll pay 7 times gross,” or “I'll only
pay 6 times gross.” But what if operating expenses turn out to be 8 times gross!?! The Gross Multiplier
method considers only one leg of the 3-legged stool. It does not take into account operating expense or
financing.

Leg 2 – Operating Expense – A primary concern in considering an investment property is what it will cost
to operate the property. What will it cost to fix the place up initially? What will annual repairs cost? Real
estate tax? Association dues? Property management costs? Insurance? Utilities? Advertising?
Supplies? Miscellaneous expenses? If the property has never been rented before, you need to develop
and estimate of these costs yourself. If the property is already a rental, ask the seller for their “Schedule E.” That's the form they've used to report their annual income and operating expense to the IRS. There's no reason an honest seller wouldn't want to show you their Schedule E.

Leg 3 – Financing – Interest rates are currently at an almost historic low. But financing of investment property should still be one of your most important calculations. In addition to using the Gross Multiplier formula, many investors figure the Capitalization Rate, or “Cap Rate.” The Cap Rate is the rate of return used to determine the value of the property's income stream. This can be very useful in comparing two or more properties you're considering purchasing. However, its primary benefit is its indication of the interest rate at which you should borrow.

To calculate the Cap Rate, you use the “net operating income” and the property price. Thus, this
calculation only considers two legs of the stool, ignoring financing. But since the method assumes that
you're paying cash for the property, the Cap Rate will stay the same whether your getting a 4%, 9% or 12%
rate on your loan. Therein, lies the key to this calculation. If the interest rate offered you is less than the
Cap Rate, the property is producing more than the mortgage money is costing you. If the interest rate is higher than the Cap Rate, don't even think about taking this loan. This indicates that the property is not producing enough to service the financing. Never risk borrowing more money than the property can support.

Finally, there's one way to determine the value of an investment property that considers all three legs of the stool at once... income, operating expense, and financing. It is the Cash-On-Cash formula, sometimes
called “equity dividend return.” In my opinion, it's the only one to use. The Cash-On-Cash calculation
considers your cash flow before tax versus the amount invested. It should always be used to tell you
whether to buy a property you're considering, whether to sell and investment you already own, or how one
property compares in value to others you're considering purchasing.

Notice that I have not mentioned appreciation. Anytime you buy real estate, you naturally hope that it will
appreciate in value. Historically, that has been true. But in the last couple of years, most property owners
have seen much of that appreciation of their property disappear. Therefore, my advice would be to never
buy investment real estate based on the hope that, over time, it will appreciate. If the only way you can
make money is for something to go up in value, that's not an investment; it's a speculation! When doing your analysis of property to consider what to invest in, always figure zero appreciation. That way, you'll know that the return on your investment is based on facts and figures, not speculation, and the investment will work for you even when the market goes stale.