The conversation I want to have today is about why it makes so much sense to invest in the Sacramento Real Estate Market.

When researching a new investment area, I would recommend that you start by determining the current stage of recovery the proposed city is in and the predictions for future growth?

If you are looking at Detroit, Michigan for example... you should not solely focus on the huge drop in prices. You should really look at the cities ability and resources to "take their lumps" and get back on track.

For the last several years, Sacramento has seen home prices soar and bloat as we headed into our current economic slump.  

As many of you heard, we have had a harsh correction to our Sacramento Real Estate Market and many families lost their homes and/or rental properties over the past 4 years.

So where are we now?

Right now we are seeing inventory slowly decreasing to 35 days. This means in 35 days there will be no homes left on the market. Many sources will report that we have seen an increase in sales and purchase prices. They even report that this may be an indication that we are out of the woods.

Although all those facts are true... I am afraid it does not mean we are out of the woods yet.

There is another part of the story... 


What about the Sacramento Shadow inventory? The what?

According to Lori Mode at Keller Williams Realty...

 "Realty Trac is reporting as of 8/12/09 5220 bank owned homes in Sacramento, CA.  According to Metrolist, we currently have 1240 REO or bank owned homes either active or pending on the market in Sacramento.  It appears that this leaves a difference of 3,989 bank owned homes still to come on the market.  In addition, Realty Trac reports today a total of 5151 Preforeclosure in this same area."

Real more about the shadow inventory numbers >>

Yes we have seen an improvement in our market, but we have not seen the last of the foreclosures.

Look at the ADDITIONAL...  5151 homes currently in pre-foreclosure in our Sacramento Real Estate market!

What is pre-foreclosure?  For the purpose of these statistics... these are homes that are currently behind a minimum of 60 days and are in the process of being taken back by the bank.


This confirms 8,000 plus opportunties are right around the corner.

The question you need to ask yourself...Will you have all of your ducks in a row in order to take advantage... to benefit?

Well wait a minute! How do I as an out-of-town investor know if Sacramento has reached the bottom of the market when this next wave of Sacramento foreclosures hits?

Well I don't have a crystal ball , but I can share with you what I do know.

Here is a graph provided by www.credit-suisse.com and is taken from a report that inventoried all adjustable rate mortgage in the country and graphed out when they were scheduled to reset.

What does reset mean?
Most adjustable rate mortgages are fixed for a specified term when originated.  This graph plots when these mortgage will no longer have the fixed payment option and the borrowers interest rate will adjust to the current market pricing.  This new interest rate is determined by the index the loan is tied to and the margin the bank put in place when the borrower signed the loan paperwork.

According to this graph it looks like we will not see a recovery of the real estate market as a whole until 2011 and/or 2012 (when looking at the effect of potential default due to adjustable rate mortgages).

In addition to issues with reseting adjustable rate mortgages, there are several other factors that impact our Sacramento real estate market.

Factors like future job loss and increased furlough days (not just state and county workers) will continue to impact our area.

Wait a minute!... Isn't this an article about why you would want to buy in the Sacramento market!  Yes... I am getting there, but you will want to know the down side of any investment! 

The good news...

Since 2005 we have seen a decline in value of more than 68% in the Sacramento Real Estate Market. This information is based on statics provided by the Sacramento Association of Realtors. You can access the statistics by visiting their website.

I have sumarized their findings below:

Keep in mind these numbers are only factoring single family homes that were sold through our local MLS system. For-sale-by-owner sales for example, would not be reflected.
  

Please note: Looking at the median home price is not always the best measure to use, but will give you a broad overview of what our market has been doing in the last several years.

Not only have the price of single family homes decreased in value over 68% since 2005, we have now dipped to a point where Sacramento real estate is undervalued.

So what does undervalued mean?
Right now prices have dropped to the point where it is cheaper to buy a foreclosed home than it is to build it.  Our clients are having to insure their homes based on the replacement cost which is much more than what they paid for the home.

Another plus...Our rental rates have held steady (or slightly declined) for the most part in the last couple of years. It will be important that you investigate your particular target neighborhood if you wish to proceed. I will address how to research that in another post.

So the bottom has literally dropped out of the Sacramento Real Estate Market and homes are now undervalued, but the rent...for the most part... has held steady (when you compare it to the drop of our home values).

Another plus that you can not graph or predict...  is what I am calling "The Room for error factor"!

The Room for Error Factor?...

Right now all conventional loans have to go through a process to meet the new HVCC requirements. Investors have to order an appraisal through the lender's assigned third party management company. This company pools together a group of appraisers and randomly selects one for the job.  

What is happening is these appraisers in the new pool are not all qualified to give an estimate of value for the Sacramento market. A large portion of them are new to the industry in the last 6 months, they live 45 minutes away and don't understand our market, or just plain don't know what they are doing in general. 

This has reeked havoc in our area... across the country for that matter.

I will give you an example of what is happening.  The random appraiser selection process picks a total yahoo appraiser out of the hat.  This person performs the appraisal and comes up with a value that is 50k less than what the buyer has it locked up for in contract because they used comparable properties from a totally different neighborhood.  Now what?

You can choose to argue with the appraiser (through the third party management company) which is a 50-50 shot based on my experience.  Often times the Seller is forced into a position of making a choice.  Do they reduce their price by $50k and get the deal done or do they risk putting the home back on the market and running into the same value issue 60 days down the road.

The vibe I am getting from my own pipeline and other REO agents in the area... some banks are just cutting the price to get the deal done. 

So again what does that mean to you as an investor.  Lets say you have a home locked up for an already good price that will provide you with immediate cash flow.... Now you have an opportunity to get a BIG FAT DISCOUNT because someone screwed up.

Now I am not telling you to invest in Sacramento based on something that might happen. What I am saying is that this HVCC process is also contributing to our decline in value. Every time a bank drops the price to get the deal done, the next borrower who buys in that neighborhood has to use that reduced price home (because of a mistake) as a comparable property when they go to do their own appraisal.

It is happening folks!

The room for Error Factor is not just tied to the HVCC drama! IT could be an REO listing agent who is assigned a property where they did not realize the actual value of the home because they are not familiar with the area. It could be a bank who is tired of dealing with a particular property who lists the home low to finally get rid of it.

Trust me... the Room for Error Factor is huge right now in our current market!

By the time you hear about our Sacramento Real Estate market recovering in the news... it will be too late and we will have already hit the bottom.  Why?  Because they are using statics that are already several month old.

I can tell you based on the inventory of homes as of today... our Sacramento market has quickly shifted to more of a Seller's market. That may change again once the shadow inventory is released.

So I guess the thing you need to ask yourself is...

If we have seen a 68% decrease in value over the last several years ... you have to ask yourself.. how much more could it possible drop? 

That is something you will need to get your head around and is a decision you can only make for yourself.

For me..

If I can get a discount on today's prices... and the home cash flows... and does not cost me too much out of pocket... what is my downside?

As a speculator all of this can be overwhelming and fear an take over!

We investors are a different breed.  When everyone is running for cover, we can pick up deals where others could not get out of their fear mode.

Under valued real estate + cash flow + potential future appreciation +"room for error" = A REAL DEAL!

Another quick note I want to mention... There are are serious flippers in our area turning homes for a profit in today's market.  As active member in our investor community, more and more Investors are getting into the flip game. This is not something I would recommend to an out-of-town investor... but it indicates that there are are really good deals right now in Sacramento.

I hope this information helps you to further investigate Sacramento as a place you want to bring your investment dollars!

Thanks for reading my 2nd installment of my article "Why should you bring your investment dollars to Sacramento, Ca.?:.

This series will include:

• Why it makes so much sense to invest here!
• Local amenities, demographics, and local major employers
• Expectation of cash flow and purchase price
• Samples of typical Sacramento Cash Flow Deals
• How to research local rental income and vacancy rates
• Selecting your Sacramento investment team  

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This blog by:

Team Newington
Sacramento Mortgage Planners
First Priority Financial
(916) 687-6868

Do I have you excited about Sacramento Real Estate Market yet?
Enlist for our next Sacramento Investor Boot Camp and Foreclosure Tour!

We will take you out in the streets and look at the opportunities in our Sacramento Real Estate Market. 
www.SacramentoInvestorBootCamp.com

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