Seller Solutions: "I've sold my property... what now??"
We are frequently asked about post disposition investing and tax strategies, and the answers have become more complicated recently. Here's a few strategies that we've been diving into lately and have compiled resources for our seller clients:
Exchange into a DST (Delaware Statutory Trust): These count as a 1031 Exchange and often offer better returns and a hands-off investing experience. It is a ownership structure with multiple investors, but investors still maintain an undivided fractional interest in the holdings of the trust. The benefits include tax benefits just like other real estate investments, passive income potential, access to larger deals and asset classes that usually are not accessible to the average solo investor. We do not facilitate these deals inhouse at Sound Realty Group, but have relationships with several reputable companies who do. We’re happy to share more info on DSTs and/or connect you with exchange strategists who can go over the details more in depth.
Invest out-of-state: We've been tracking the best markets outside of WA to exchange into. Here’s our list of top 5 growth and recession-proof markets with cash flow opportunities:
We have an extensive network of out-of-state agents and brokers and have developed relationships with agents in each of these markets. We’d be happy to put you in touch with any of them and/or pass on details about deals they have shared with us in their markets. Here’s a short list of articles and data that helped us pinpoint these specific markets.
Seller Financing: a great way to spread out the cap gains tax and get an additional return on your equity. We’ve structured several deals that had either all or partial seller financing and there are so many creative options in this space that range from short term scenarios to notes lasting for several years. With higher interest rates it often creates a scenario where a buyer could enjoy a lower interest rate than what a bank will provide therefore enabling them to pay a bit more for the property. For the seller it means they can spread out their gains over more than one year and typically seller carried interest rates will be higher than returns they would see in other assets.
State of the Market:
We’re sifting through the data for 2022 and looking ahead at 2023 and wanted to bring you the stats, takeaways and predictions of the multifamily market in the Puget Sound Region.
Our Team: had a great 2022 with lots of highlights:
The General Market:
Real Estate in 2022 nationwide can be described as a tale of two markets with everything hinging on interest rates. January through June was very much a Bull market with buyers flocking to the market to take advantage of the last chance at low rates. Bidding wars, escalating prices and waived contingencies characterized the frenzied seller’s market.
The Tri-County/Puget Sound Region:
The tale of two markets was apparent in the stats from King, Pierce and Snohomish Counties. (For reference, inventory is measured by months with 3-5 months deemed a “balanced market” and anything lower is a “seller’s market,” anything above that metric would be a “buyer’s market”).
Similarly, the ratio of list price to sold price is a good indicator of market trends.
By Chelsea Shapiro, Senior Broker
We live in a 24/7 real time, instantaneous kind of world, but in the real estate industry most things operate on a 90 day cadence. Why? That’s often the timeframe it takes to get a property ready for market, under contract and closed. It’s also deemed a market cycle and when data from consecutive months becomes meaningful. All Summer, we have been noting the shifting forces in the market (primarily driven by interest rates increases and the responses they trigger). We've been feeling buyer and seller trends dramatically change, and now seeing the data that backs up and codifies a different real estate market than 90 days ago.
In the tri-county area, the average "Days On Market" has increased, the number of sales have dropped, and the months of inventory has gone up dramatically (see data below). Depending on the County we are in a “Balanced Market” and trending in the direction of a “Buyer’s Market.”
Interest rate increases have been the driving force behind this shift, and the Federal Reserve has promised more rate hikes this year and into next. To illustrate how that impacts pricing, we’ll dissect a 4plex deal we sold last Spring. See below for the difference between then and now.
It’s a challenging and shifting market for sure, so Why Buy? Many successful real estate investors made their money by picking up properties during the last downturn (2008-2013). After years of fierce competition and bidding wars, buyers now have leverage to find and/or create a good deal. We think the next few years will be a great time for acquisitions. It might take some ingenuity to compensate for the expensive financing, but that’s where creative lending solutions become optimal, and most lenders are predicting rates to drop after 2023 so refinancing is always an option. The one caveat is hold time - a flip or quick value add play is tough to pull off in a receding market, but as long as buyers are prepared to hold long term buying now is great idea!
If we’re in a down market Why Sell? If you don’t have to sell and are primed to achieve cash flow and hold for many more years, then our recommendation is to hold. However, if you’re needing to sell in the near future now is your last chance to capture some of the massive appreciation our region has experienced in recent years. For context; this market downturn should not be anywhere near as bad as 2008-2012, but using that timeframe as an example, it took almost 10 years for Pierce County multifamily property values to get back up to the values they were at during the previous peak of 2007 (see graph below). That said, it could take several years for values to get back up to where they are today. “Waiting for the market to turn round” may not be the best option for anyone planning on selling in the next couple of years. We are still very close to the top of the market! Multifamily values in Puget Sound Region more than doubled over the last 5 years. If you purchased your property more than 3 years ago, selling today would still be a huge win!
Whether buying or selling, make sure you employ an experienced and knowledgeable broker! This is a tricky market to navigate and having a seasoned broker who can suggest creative and solid strategies on your team might make all the difference in your ROI.
In the bi-weekly newsletter Eye on the Economy, NAHB Chief Economist Robert Dietz provided the following overview of the nation’s economy and its impact on the housing market.
Rising mortgage rates, high inflation, low existing inventory and elevated home prices caused housing affordability to fall to its lowest point since the Great Recession in the second quarter of 2022. According to the NAHB/Wells Fargo Housing Opportunity Index, just 42.8% of new and existing homes sold were affordable to a typical family. As more households are priced out of the for-sale market, a number of key housing metrics — including existing home sales, new home sales, single-family permits and single-family starts — have experienced significant year-over-year declines, characterizing the ongoing housing recession. Some markets are now seeing price declines as well.
The volume of new home sales in July fell to the lowest level since January 2016. Sales of newly built, single-family homes came in at a 511,000 seasonally adjusted annual pace, which is a 12.6% decline from the June rate and 29.6% below the estimate from a year ago. Sales-adjusted inventory levels are at an elevated 10.9-month supply in July. However, only 45,000 of the new home inventory is completed and ready to occupy. This count has been rising in recent months and is up 40.6% compared to a year ago. New home sales are likely to continue to show weakness in the months ahead.
Total existing home sales, as estimated by the National Association of Realtors, fell 5.9% to a seasonally adjusted annual rate of 4.81 million in July, the lowest level since May 2020. On a year-over-year basis, sales were 20.2% lower than a year ago. The July median sales price of all existing homes was $403,800, up 10.8% from a year ago, representing the 125th consecutive month of year-over-year increases — the longest-running streak on record. However, price growth is cooling quickly in most markets according to other reporting.
The softening of housing demand has led to ongoing declines for home builder sentiment, per the NAHB/Wells Fargo Housing Market Index (HMI). Builder confidence fell for the eighth straight month in August, falling six points to 49 and marking the first time since May 2020 the index fell below the key break-even measure of 50. The August buyer traffic number in the builder survey was 32, the lowest level since April 2014, excluding the spring of 2020 when the pandemic first hit. Roughly one-in-five (19%) home builders in the HMI survey reported reducing prices in the past month to increase sales or limit cancellations. The median price reduction was 5% for those reporting using such incentives.
The decline in the HMI is consistent with declines for single-family construction. Single-family starts decreased 10.1% to a 916,000 seasonally adjusted annual rate and are down 2.1% on a year-to-date basis. This is the lowest reading for single-family home building since June 2020. More declines lie ahead, as single-family permits decreased 4.3% to a 928,000 annual rate, and are down 5.9% on a year-to-date basis. NAHB is forecasting 2022 will be the first year since 2011 to record an annual decline in single-family home building.
The multifamily sector, which includes apartment buildings and condos, decreased 8.6% to an annualized 530,000 pace. Multifamily construction remains very strong given solid demand for rental housing. The number of multifamily 5+ units currently under construction is up 24.8% year-over-year. Multifamily development is being supported by a substitution effect, with frustrated or priced-out prospective home buyers seeking rental housing. Similarly, demand for single-family rental properties is rising, leading to gains for single-family built-for-rent construction. There were approximately 21,000 single-family built-for-rent starts during the second quarter of 2022. This is a 91% gain over the second quarter 2021 total.
The outlook for the housing market is now dependent on incoming inflation data and the Federal Reserve’s monetary policy. It appears, for example, that the core Personal Consumption Expenditures price index measure of inflation has peaked. And some economists are forecasting the Fed will decelerate its rate hikes, with perhaps a 50 basis-point hike in September, following the 75 basis-point hikes in both June and July. Nonetheless, the Fed will continue hiking, with the bond market pricing in the 10-year Treasury above 3.1% for the first time since late June.
Half-full glasses and optimism are hard to come by lately and so often cynicism rules the day when it comes to economic forecasts for our country. Despite all that, I am choosing a set of rose-colored glasses for our outlook on the housing industry, and believe there is ample data to back an optimistic perspective. My brokerage has been closely tracking interest rates and economic activity all year, but two weeks ago when the biggest single day interest rate in decades took place, we dialed in. Our team signed up for every webinar and financing class possible, researched dozens of economists' opinions and sifted through all sorts of data. Here are 7 reasons backing our optimism, and why I believe home values won’t collapse and that this is a different rodeo than the 2008 crisis.
1. Supply outweighs almost every other point to be made. We are still in a housing supply crisis and short by millions of units. We have not built enough to keep up with the population and demand for all types of housing in almost all markets across the country. Even if builders ramped up production now, the delay in those hypothetical units being delivered to market does not service the demand now and in the immediate future. This was not the case in 2008 as new construction was over-built.
2. Millennials - in 2008 I was a 22 year old college student racking up a tab of student loans and looking at a dismal job market upon graduation. Home buying was not an option or even a desire at that point in time. Fast forward to now and there are 18% more people between the age of 25-34 since 2006, over 46 million strong- this is a huge crowd. These millennials now want to, and are ready to buy homes. Many of them need to as they get married, have kids and rent rates are becoming burdensome. Millennials create the demand that was lacking in 2008.
3. Home Equity - the last few years have created the greatest surge in home equity in history. 9.9 Trillion dollars or an average of $185k per household is the amount of equity Americans have in their homes. Even if prices level out or dip slightly most homeowners have an ample cushion of equity. Being “underwater” or “upside down” in their home was a common trend after 2008 where the margins for equity were very narrow (in part due to loose lending practices) and the housing bubble was the trigger for the recession not vice versa. What we have now is much different.
4. 4 Trillion Dollars is the amount of money that is sitting in consumer bank accounts. Chalk it up to government handouts, wage increases, lifestyle shifts with less travel, home budget awareness etc… There is a lot of money out there. We are a consumer driven economy which begs the assumption that that 4 Trillion will be spent on something, perhaps not in 2022, but in the near future it’s a safe bet that much of that money will find its way into the housing market.
5. Migration has been a demographic trend since before Covid, but has persisted and strengthened as many folks migrate from the top 25 metro areas to the South and Middle regions of the Country. In the Pacific Northwest this has also included an influx of California residents relocating up the coast. Movement is good for the real estate market.
6. Remote Work is a driving force impacting demand for larger square footage. Covid ultimately showed us the value of home and shifted lifestyle trends in favor of staying home, working from home, and needing bigger or better square footage. The ongoing risk of another potential shutdown keeps home top of mind for many Americans. Many homeowners have taken the last few years to execute remodel and home improvement projects. This feeds into the lifestyle shifts of emphasizing home, working from home, and ultimately adds to home values across the board.
7. The Dodd Frank Act is also a game changer in the then vs now comparison. Today’s homeowners are more qualified and at way less risk of default than two decades ago. Lending underwriting requirements, 30 year fixed interest rates, mortgage payments that include interest and principle are just a handful of things that protect homeowners which in turn is a bulwark in housing values and the overall housing market.
My colleagues and I speak with investors everyday who are wishing and hoping for a housing market crash that would open the floodgates to mythical deals with excessive cash-on-cash and a guaranteed “buy low, sell incredibly high someday strategy.” Our optimism in the housing market holding its value is often not welcomed by these folks, but that doesn’t phase us at Sound Realty Group. There are always going to be good real estate deals out there; it just might take some ingenuity and a creative perspective to source them, and put them together - good thing we specialize in just that.
By: Chelsea Shapiro, Sr. Broker at Sound Realty Group, Inc.
Sources - Guild Mortgage, BKCO Mortgage
Solid, turn-key fourplex with plenty of room to add value. 5.6% Cap Rate, 6.4% Market Cap Rate. Or, possible condo conversion? All units are 2bed/1bath with private patio/balcony, upper units have Puget Sound views. New owner can add coin-op machines to the shared laundry room for additional income. Rents are currently below market rates and all tenants are month-to-month. Unit interiors have been updated within the last 8 years, newer windows, and newer roof. High-demand rental close to shops and restaurants, 15-minute drive to SeaTac Airport/20-minute drive to DT Seattle.
$1,100,000 | 13244 12th Ave SW, Burien
For 2020, here are our latest top 10 misconceptions we’ve found that the public has about 1031 Exchanges.
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