Al Lorenz

Growth management has created high costs for real estate in Washington. With a less robust employment market, and the potential migration of large employers like Boeing (can Microsoft be far behind?) out of state, we could be in for some slow times in Washington State. But, we've gotten the government that has been voted for, so the public will have to change their minds on priorities before we see change.

Dan Beardslee of Erlandsen Engineering has been writing some great articles on impact fees, funding infrastructure and potential solutions in the Wenatchee Business Journal. Unfortunately, the articles are not available on their web site so I cannot link to them. Dan runs the local office in Chelan and often contributes

Yesterday, there was an Associated Press article about states and local governments dumping impact fees during the recession. They're finding impact fees are a big deterrent to - read more about impact fees in Chelan County

While the U.S. government ponders its supposed exit strategy from the interventions it has made in the private sector, it is important to consider what an actual exit strategy should be for any of your investments and particularly your real estate holdings.

Why do you need an exit strategy? Every investment has an optimal life. Sophisticated investors purchase stocks with a target sale price and strategy of getting there before they ever make the purchase. Real estate is no different except it is a much less liquid investment than stocks that can take some time to convert back into cash.

Markets are cyclical, as we're being reminded again now. Real estate typically has a few years of rapid price gains with periods of slow, no or sometimes even negative growth in price. In my experience, those cycles have a 10 to 15 year period. Part of having an exit strategy is planning to sell when the market is ready.

Real estate is not unique in this regard. The corporate mergers and acquisitions market cycle is very similar. A gauge of that market's conditions on whether a sale or merger might make sense would depend on the: interest rates, tax rates, economic cycle, inflation rates, stock market, foreign buyer activity, demographics and foreign exchange rates.

All of the conditions, except the economic cycle, are currently favorable for mergers and acquisitions. A highly favorable M&A market usually only comes along once every 10 to 20 years and is only a few years long.

For real estate, the market factors include: interest rates, tax rates/incentives, economic cycle, inflation, inventory levels, vacancy rates, financing availability and local conditions. Interest rates, tax rates and inflation are favorable and the economic cycle, vacancy rates and financing availability are currently unfavorable. Local conditions vary. As we know, a more optimal time to sell real estate was in 2005. As we move forward, capital gains exemptions may go away and tax rates increase, inflation could increase but the economic cycle may improve.

Notice that many of the conditions that affect real estate are also conditions that affect the M&A market. Tom Vanderwall, an expert in the mortgage markets at Bloodhound blog and Straight Talk about Mortgages, posted on his thoughts on exit strategies today as well. The good news from Tom's thinking:

we're looking at most likely 12 to 18 months with stable interest rates. I believe the overall trend during that period will be slightly higher, but not substantially higher.

It will eventually start turning around and become a decent economy. As soon as that happens, inflation is going to become an issue. When inflation becomes an issue, interest rates are going to spike and spike dramatically. Am I willing to say how high? Nope. I'll use the term substantially, but I won't say how much higher than they are now. Why not? Because how high they go will depend in many ways on how the government does at unwinding all of the government interventions that have taken place.

...So we've got a situation where the likelihood is that over the next 12 to 48 months, we're going to be looking at a government that needs to unwind their current positions in the financial markets and it's going to create an economic situation where we've got higher interest rates, lower demand and the possibility of a double dip recession.- Bloodhound Blog

Remember, capital gains exemptions for investments are likely to be reduced or eliminated by the end of 2010. Also, real estate pricing lags inflation. Since inflation directly increases financing costs, the higher cost of financing holds down price increases in real estate until after the inflation moderates and interest rates come down. If other conditions are right, that might be the time for the next real estate boom. My crystal ball is broken, but I don't think all of those things are going to happen real soon. So, I expect high inflation and interest rates are coming and will hold pricing below inflation.

What does all this mean for real estate and investing? From a seller's point of view, the next 12 to 24 months might still be the best selling opportunity for many years. So, if you can't sell at the peak of the market, at least sell when the market is the best it might be in the time you have to get it done. Loans that are not already fixed rate and won't be paid off in the next 2 to 4 years should be moved to fixed rate loans in the next 12 to 18 months. Look at your real estate investments and make sure you have the right properties and the right loans on those properties.

What about homeowners? The timing of when you sell your home may not depend on looking at it as your investment, but as the place you live. Regardless, you can look ahead and see if you might be needing a bigger house, or to downsize in the next few years. If there is something coming up that might make you wish to change homes, consider whether it makes sense to do it sooner rather than later because the earlier time frame may make strong financial sense.

As far as buying, if you know you are going to be somewhere for 5 or more years and you will have steady income, now might be a fine time to buy a home and take advantage of tax incentives and low, fixed interest rates.

Investors should be looking for properties that generate income, with low risk for vacancy that they expect will be a good inflation hedge. Something like a coin-op car wash in a prime location might be a good example. Buy at a high CAP rate (net operating income*100/purchase price) and with either cash or a long term fixed rate loan. There are deals out there, that can be financed at fixed residential rates for 20 plus years whose income is 1% per month of the purchase price. Just like the old days! If you find some great development property with a motivated seller, buy it low enough that you can sit on it (cash is king again) for 5 to 10 years while the market improves or have a strategy that it can be profitably developed and sold in this market or worse with higher interest rates.

Get a good team together. It's probably going to be quite a ride. There will be lots of money made and lost. If you are going to play in this game, or even get the help you need to sell your home, you need a real estate expert that has your best interests at heart.

Here's a guest post (part 1 of 2) from real estate investment connoisseur Jeff "Bawld Guy" Brown. Jeff spends his days helping people invest in real estate as a road to retirement (something everyone is having a harder time reaching these days.)

I think Jeff is probably right in his thinking.

Take the time, read it over and then either e-mail Jeff Brown or call him at (619-889-7100) or e-mail me at Criterion Properties or call me at (509) 630-6769. We'd both like to talk with you further.

Al Lorenz

Are We Coming To A Real Estate Investment Fork In The Road? · BawldGuy Talking

We have the largest inventory of Lake Chelan waterfront homes available this year since, well, possibly ever! There isn't any more lakefront land being made either and there are deals at nearly every price point!

A cute 3 bedroom, 2 bath Lake Chelan watefront home on .15 acres near Willow Point Park was listed today at $925,000.

It includes a dock, is connected to sewer and is close in to Manson! It was constructed about 1962! Come let me show you another Lake Chelan waterfront home for under $1 million!

In 2009, 11 home sales were closed in June, compared with 13 in 2008. The sales dollar volume was almost 91% of last year's volume in June as well. While that may not sound all that great, it is an improvement over the first 5 months of this year.

Average Sale Price for the year is down to $387,907 from $460,922 for the first six months of last year. Last month, the Days On Market for all sales for 2009 averaged 220 days! June sales brought that number down to a more respectable 179 days. That may mean that sellers are beginning to adjust their listing prices to the market or may be simply be a more statistically significant number of transactions for the year.

Listing volumes continue to dwarf last year, with 84 homes listed in June as compared with 59 last year. There are currently 373 active residential listings in my reporting area. Even at June's higher volumes, that would be nearly a 34 month supply. If you are thinking of selling your Lake Chelan home, you should plan on marketing your home well.

Click for my complete Lake Chelan Cooperating Broker Home Sales Summary.