Offer price help needed in Northern Utah!

[Joseph Davis]

So I was listening to the podcasts the other day - and I could have heard wrong - but a guest said that they always come in at 70% of the asking price and then deduct rehab costs below that number. When I run this out for some of the properties we are looking at in Northern Utah, the offer is coming in way low - sometimes at 50% of the asking price. My realtor doesn't seem to think this is reasonable, and I kinda agree with her. I'd love to get these properties at this level -but it isn't happening. What we are trying to do is find rental properties & have NOI of at least $500/month per unit after all expenses. We don't want to carry a note for more than $150,000. Our goal is to have 40 cash flowing properties in 10 years - purchasing 4 per year. The problem I'm seeing is that all of our estimates are way below that $500 number. The only way to change it is either put way more money down (not going to do that) or get the purchase price way down. Any ideas? Am I looking at this wrong or being unreasonable? We are new - so that should explain a lot. :)

[Jeremiah Maughan]

William makes good points about potential indicators. My lead-lined crystal ball tells me that we are in a decelerating market. Good indicators are absorption rate and the affordability gap. Days on market seem to be stretching out, prices are outpacing ability to purchase, and I think we're on borrowed time with interest rates. The minute those go up you'll see some things shift. How much time that actually turns into I'm not really sure, maybe year or two and we'll be at more of an equilibrium?

Here is my opinion, as posted on Facebook about a month:

"Yes, the real estate market is back to 2006/2007 prices but you have to remember it is doing so with 2013 interest rates. If we put the interest rates back to 2007 rates, then we would need to cut something like 25% off the values to have the same monthly payment. Something to think about when you look at home values and consumer buying power."

That got me thinking about other factors, so I followed it up with this:

"What about income and inflation? Here are some more numbers for everyone to consider. I did some digging using the US Census Statistics, median home sales prices as recorded by the MLS (kept in a table by the Salt Lake Trib), and some inflation calculators. I went back to 2004 which is before our home prices started going crazy and we were still on a natural progression. Check this out:

Since 2004, inflation has totaled 27%

Since 2005 to 2014, median household income in Utah County has gone up 30%

Since 2004, median home price has gone up 59%

I'm not economist nor statistician, but based on that, I surmise that inflation can offset all but 3% of income and all but 32% of home price growth. Here's the kicker:

A 6% interest rate on $250k loan is a payment of $1,500/mo

A 3.5% interest rate at the same payment allows a loan of $333k.

A 32% increase in buying power.

"Well that's ironic isn't it? So, in conclusion, the home value spike of 2005-2008 was due to easy to get loans. The home value spike of 2013 to 2016 can be significantly attributed to cheap money. So does that mean that home values should be 32% lower? I would not go that far, but certainly if we had normal interest rates the home values would HAVE to be 32% lower.

"We have a massive demand right now and significant shortage of quality homes available to purchase. New construction, as busy at it looks, is still significantly lower than historic highs. So that looks like a legitimate supply and demand issue. We also have land constraints driving prices up. But is that significant demand only due to the fact that money is super cheap which means we have more buyers than we normally would have? I think so. Does it matter though, since if the money was more expensive, prices would be lower so we could all still buy the same house it would just be a different price points (higher rate, therefore lower value and same payment).

"So the moral of the story to me is the interest rates are going to really hose everyone if they spike too fast. I think we are fine IF the rates don't go crazy. Eventually they have to go up though, so I expect we will see them start to creep up which will mean home values will flatten out and stay that way for several years."