Total Available Market - 2, 3, and 4 units

[Chris Martin]

This post is specific to the Raleigh area, but the methodology is applicable to many other cities and counties in NC. 

In the Raleigh area many people, especially from out of state moving into the Raleigh area, post about wanting to by a quad, a 4 unit building. Often the posts refer to wanting a 'small multifamily' which, over time I have learned, translates for them to property financed as a traditionally underwritten 1-4 Family, owner occupied dwelling. 

The concept is sound: live in one unit and rent the rest. It's a great idea, assuming you can find a 2-4 unit that makes financial sense. 

The purpose of this post is to identify the Total Available Market (TAM) for all these asset classes, where the current owners are located, what year the units were built, and to see if it is possible to glean any market dynamics from the data. Data sources can be any or multiple of these: MLS (work with a broker), Zillow data services, realtyTrac, your local AHJ (Authority Having Jurisdiction) or county records group, a title company with in-house county property records, companies like coreLogic, eStated, trustee records, etc. Disclaimer: I haven't worked with many of these data sources for over 5 years now but many of them had similar data sets and several had APIs that were reasonable. Some were reasonably priced, some free(see note *), some expensive. I suspect most people will use MLS queries and you will (should) get the same results as in this post. For me, though, I use the low tech, no amenities interfaces from county data dumps because I am old school. To each his own. 

When you get your TAM report from your broker or via your data search, you should see something similar to one of these graphs: 

My graphs are based on public records, not MLS or Zdata, so there may be some discrepancy in your graphs. The takeaway here is that there are almost no new build quads or tris in the last 30 years, and there are a few dozen (at most) duplexes built in the past 30 years. So that's your TAM. Using simple ratios of 2-4 units relative to all Residential property, here's the result:

Type			% of Residential
Single Family			97.2
Duplex			0.74
Tri			0.13
Quad			0.15
Other			the rest

The Wake county Quad market consists of 95% in Raleigh, 5% not in Raleigh. The Owners of these quads consist of 91.5% owner of record addresses in NC, 2.5% in CA, 1.9% in NY. The Wake county duplex market consists of 71.5% in Raleigh, 8.7% in Cary, 4.0% in Wake Forest, 3.5% in Zebulon, 3.4% in Garner, other cities the rest. Owners of duplexes, like quads, are mostly NC at 93.7%, with CA and GA (1.8%, 0.7% respectively) followed by smaller percentages in other states. 

One significant item to note is that the "Other" category will include apartments (garden, rooming house, etc.) that will have one entry as far as the count, but the property record will have multiple cards that represent the individual units. So it is not the case that less than 2% of Residential units are apartments, in fact the count is higher. Quads (and duplexes and tris) are classified so that each unit is, basically, single carded as a unique real estate ID, so my counts don't need to consider separate cards. When you undertake analysis in other markets, keep this in mind because not all counties handle records the same way (hence, you need to normalize the data.)  

I had hoped to cover counts of 'transfers', units sold by type, but the data I'm seeing doesn't make sense to me at the moment. I will post when I have confidence the sales data reflect reality. In a nut shell, the numbers look too high. I looked at a couple of them and they were not arms-length transfers, so I need to get the 'real' sales. More later....

Methodology: TAM built only on Residential Land Classification with Type and Use of Two, Three, or Four Family. Searches consist of TAM counts, Year Built field annualized, Owner address (which state) in public record, location based on Physical City field. Queries are based on 6/1/19 datasets, so some results (e.g. ownership state) will change over time. 

Notes (*): The bigger counties (Mecklenburg , New Hanover, Wake, others) provide raw data and for some smaller counties you can download the data, indirectly, from the GIS user interface. In Columbus county, for instance, this is the case and there is a download button from the parcel GIS viewer. 

[Chris Martin]

Originally posted by @Chris C.:

@Chris Martin nicely done. Yep that was my methodology when I first moved here but it has changed based on supply.

It probably doesn't make sense to build many small multi when sfh in downtown Raleigh are selling for 400/500k+. Ain't no way are duplex etc gonna get anywhere close to 1% or a "decent" cash flow when you buy just the lot for 150k. And new construction is way over $100/sqft

I agree with your conclusion in theory. I randomly looked at just one duplex in the newer build class (2017) and it sold for $202/sq.ft. ($619K/3060 sq.ft.) It is an infill project near NCSU. The quarter acre lot is/was $75K assessed that sold for $80K. I assume a 10% builder margin, thus the build cost (sans lot) is $156/sq.ft. which sounds plausible.

lot: $80K
profit: $62K
build: $477K or $156 /sqft

This property sold to a CA buyer for $619K. Unit is encumbered with conventional, 1-4 Family Rider, $464K loan. While I would not purchase this property because rents would struggle to cover the loan and tax burden, others (e.g. CA buyers) will and do. Some buyers are 'parking' money in real estate they hope will be break even cash flow-wise, provide depreciation losses tax-wise, and potentially have some upside appreciation-wise. I've seen this in multiple asset classes over the past few years.

The question for me becomes: is developing a 2-4 family property an opportunity? I'm not a builder, just observing what the data presents. If a builder can get $202 per square foot for a duplex in Raleigh, the question I have is are builders selling SFR for $202 / sq.ft.? More? Less? Maybe the motivating answer is in builder margin instead. While this build was not Toll Brothers, for FY2018, the Average delivered price (sample size=1247) for a Toll Brothers SFR in the south region was $741,000 but I don't know the average square footage. Gross Margins were better than 10%, but TB develops subdivisions with more efficient operations than an infill project. 

I don't have time to build queries at the moment, but I'd like to know when the CA buyers purchased their property. My guess is most bought in the past 3 years, but it's just a guess.