The exuberant bull market of 2004-2007 produced instant millionaires and in 2008-2010 many paupers. No where in the US did housing prices rise as rapidly in all market segments as they did in the Phoenix area. From new west valley developments in cities such as Avondale, Buckeye, Litchfield Park, Surprise, Goodyear and El Mirage to cities in the south and east including Mesa, Queen Creek and Maricopa. This is where tract home developments sprang up on arid lands and people stood in line for hours for the opportunity to buy. Home prices ranged from $150-$350k. These developments were comprised of cookie cutter homes with an average of 1600 -1700 square feet.
In the luxury market magnificent mountain top estates in Paradise Valley and North Scottsdale saw prices rise to over $1000 a sq. ft. Condo projects along the not so aptly named Scottsdale Waterfront where well know builders took the plunge to capture buyers money, had global waiting lists of people wanting to experience the new downtown phenomenon. It was like lining up outside a Best Buy on black Friday to scrape up the few hot bargains. The major difference every single family home, condo, multi-family home and townhome seemed to scream, ”I’m a bargain, buy me now as I’ll be 5% higher in two weeks”. And buyers did buy!
Today the landscape is littered with empty houses, weeds growing 6 ft high in the front and backyards of entire neighborhoods. We have all read and heard hundreds of stories and have seen these stories come alive in our own areas. Many are now profiting from the mistakes of first time home buyers, move up buyers and investors who would flip houses for double digit profits within weeks of closing their escrows. But the bullet train started to slow down by the first quarter of 2006, even though prices continued to move upward. As fast as prices moved upward the downward spiral took hold and there was no way stopping it, not then and not now.
Although the downturn has started to flatten out, some sense of reality has returned to the Phoenix area housing market. Sellers are starting to become more realistic today about what their homes are worth. Buyers are seeing more opportunities for homes that are more affordable. In December of 2007 the average sales price of a Phoenix home was $321,000. As of December 2010 the average sales price was $130,000 which reflects a 12% drop from the beginning of 2010. Are housing prices still dropping, the answer is a resounding yes. But by the end of 2011 it could be close to the bottom, maybe another 5 or 10% left to the drop. Higher end properties may see up to another 20% drop.
So in this littered landscape how and where does one find the best deals? Who will benefit most in this market? How do you take advantage of the REO’s, short sales and even an equity sale? We rarely hear about equity sales anymore, but it’s where a homeowner does have equity in the house. It’s not a distressed property as the house is worth more than the balance left on the mortgage.
The first thing any buyer needs to do is determine how much they can afford to invest. Are they going to pay cash or finance the home? With the tough lending environment today it is very difficult to qualify for a loan if you are not an American citizen. Canadian buyers can purchase one home as a vacation property providing they put down a minimum of 25%. Lending criteria can change from week to week so investors need to constantly check on new programs that may come available. As of this time there are no loan programs available from institutional lenders to other foreign nationals.
The next step would be to select the city or zip code where they will make the purchase. The greater Phoenix area is unique to many other cities as it is comprised of thousands of subdivisions. It is in the buyer’s best interested to drill down to a few specific subdivisions before deciding on an individual property. Comparative market analysis (CMA) needs to be done not only on active properties but must include pending sales and solds over the past 30 days. In some cases you may have to go out 90 days to get enough statistics. Arizona is one of the few markets where home prices are spoken about in terms of $ per sq. foot. This is the yardstick real estate agents use in deciding how much a client should pay for a house and where a selling agent should price a home for sale. You want to be able to purchase the home for less than the last comp that was run on price per sq ft. This is important if the prices are still trending downward.
For investors looking to build a portfolio of Arizona rental properties the west valley area of Greater Phoenix offers strong value. You can buy a nice 4 bedroom 2.5 bath home in the 2000 square foot range for $70k-$80k and get $12k rental income per year. We prefer to deal in homes built after 2000 as there are usually less issues. Some of these homes can be fixed up and flipped for those investors looking for a short term gain, but the majority of investors are looking for rental income which is cash flow positive and long term appreciation. It is imperative to analyze statistics daily and know where the REO’s and Short Sale bargains are. Arizona has an advantage no other state has, The Cromford Report. This is available through our MLS system. It is the most comprehensive statistical database tracking the residential resale market in the Greater Phoenix area. It also provides daily real estate market insight. Since short sales can take months to close, it is important to watch the homes value on a monthly basis as the price you offered today could turn out to be too high 2 months from now. A savvy buyer’s agent will then go back to the listing agent and resubmit a new offer at a lower price sometimes before the bank has even given their approval on the original offer.
The cash buyer is king today, because they can buy on the courthouse steps. This is like the old west meets modern urban. Yes there’s actually such a place where in any given day tens of millions of dollars in real estate goes from trustee to investor. The steps in front of the Maricopa County courthouse in downtown Phoenix are crowded most afternoons as dozens of people wearing sunglasses ear buds plugged into their cell phones and flip-flops gather around auctioneers. You need to be represented by a knowledgeable Realtor who has done the homework on your behalf and checked many conditions before even deciding what bid makes sense. It is important to know the condition of the property, if there are any liens against it, what the comp values are, is there clear title, just to name a few. A $10,000 cashiers check is required just to bid on a property and the buyer must be prepared to pay the total balance due by 5PM the next business day. This isn’t suggested for the novice investor.
Auction.com is a GSA contract holder and conducts online and live auctions several times a year at the Phoenix Convention Center. The advantage here as opposed to the auction on the courthouse steps is you have an opportunity to visit any home you’re interested in bidding on at least 2 weeks prior to the auction. You get to kick the tires so to speak. You can even bring a knowledgeable 3rd party to do a cursory inspection. You can pay by cash or have a mortgage already lined up. This is good for the first time home buyer as well as the seasoned investor.
There are a number of programs available to first time homebuyers from cities throughout Arizona. Many are administered by the Community Housing Resources of Arizona (CHRA) which is a Phoenix-based, 501(c)(3) non-profit organization created to help low-to-moderate income families purchase their first home. A good website for information is http://www.communityhousingresources.org/programs.php. Several of the cities participating in such programs include Phoenix, Glendale & Gilbert.
Equally as important as the price of the deal is the research that must be done when negotiating the purchase of a Short Sale or REO (Lender owned property more commonly known as Real Estate Owned). A perfect example is a CFD payable to the City of Buckeye where we have completed many transactions. A CFD is a Community Facilities District Bond. Suffice it to say if the real estate agent doesn’t put specific language in the purchase contract making sure the lender will pay off this obligation in full, the buyer will be paying hundreds of dollars a year more for as long as 15 years. Knowing the nuances of each specific Arizona city is a must when purchasing a property. Cash buyers most of the time will be able to secure a better price. Buyers needing a loan can purchase a Fannie Mae home using their HomePath program where they can benefit from lower down payments, flexible mortgage programs, no mortgage insurance or appraisal fees and even get their closing costs covered.
Arizona is one of the top five states attracting foreign investment in real estate today. Many investment oriented agents are able to offer investors from all over the world a complete turnkey package that will usually show an 8-14% cash on cash return. With people being displaced out of their homes and needing a place to live, investors see this as a great opportunity to secure profits in the rental market. It will be many years before these previous homeowners will be able to qualify for another mortgage, so the Arizona rental market should remain strong for the next 4-5 years. The key is knowing the right areas to invest in that will give you the best return on your investment. The main factors to look for are: how close is it located to the freeways, is it in a good school district, is it near shopping and restaurants and is it not too far from the major work corridors.
Arizona has seen its housing market crash, but every month people are still choosing to move to this beautiful state due to its weather, beauty and the lifestyle it has to offer. If you change the way you think to the long term growth potential as opposed to the get rich quick phenomenon, then you will understand what the draw has been in the last 6 months for buying and investing in homes in the Greater Phoenix area.
Lorrie Feld and Joe Kaminsky
Keller Williams Integrity First