Saturday, June 27, 2015

Tax Expectations

As I'm showing property to new clients for the first time I am often asked "What are the taxes on this one?" Most MLS systems and real estate websites display the previous year's property taxes on listings. My research tells me that a new owner can expect his taxes to be about the same in about half the cases. It's the other half that should keep prospective buyers from seeing this as anything other than a mildly-predictive historical note.

I pulled 24 property sales in Cocoa Beach that closed in June and July of 2013 at prices greater than $150,000. All but one of the 24 sales were at prices higher than the Property Appraiser's market value at the time of sale. [Note: this confirms that the PA's market value is not an accurate predictor of selling prices.] Half were then homesteaded by the new owners and half were not. I compared the seller's market value assigned by the Property Appraiser at the time of the sale in 2013 to the new market value assigned a year later for the 2014 tax year. Surprisingly to me, over half of the sales had zero increase in market value and were about evenly divided between those homesteaded and those not. All but one sale had tax increases of less than 25%. The one higher exception was a long-time homesteaded property with a partial interest sale that triggered a reassessment and a rise in the artificially low taxes from $2700 to $4900 a year. Note for anyone considering selling a partial interest.

Another surprise was that taxes for new owners in general have come down as a percentage of purchase price. Another random sampling showed that the total tax bill for most properties in the sample group has barely budged in six years. Average tax bill for all 24 properties in the first group was less than 1.5% of the purchase price, much less for homesteads. I am happy to share the actual range and average of both categories with anyone who's interested.

"Next in importance to having a good aim is knowing when to pull the trigger."  __David Letterman

Monday, June 22, 2015

All the Wrong Questions

The brutally cold winter of 2015 reignited a common dream for many, that of owning an income-generating vacation getaway in a warm oceanfront place. Cocoa Beach has made that dream a reality for many. Over the years I have gotten scores of requests for an ocean condo that would pay for itself while serving as a getaway for the owner. For most people, that condo does not and never has existed. Change "pay for itself" to "pay some of the costs" and units begin to materialize.

What questions should a prospective buyer of a rental ocean condo ask the seller? Some questions may have misleading answers. Let's look specifically at vacation rental condos, those with a minimum rental restriction of a week or less. In Cocoa Beach and Cape Canaveral there are less than 15 oceanfront complexes that allow weekly or shorter rentals. Because of the scarcity, high occupancy and income are possible in most of these units. For a buyer inexperienced with vacation rentals, these units can be difficult to evaluate. The previous years' income statements often won't accurately predict a new owner's likely performance. As mutual fund disclosures tell us, past performance is not an indicator of future returns. A buyer using previous years' statements to include or exclude properties for consideration may be making flawed decisions.

Imagine the owner of a nice weekly rental vacation condo in Cocoa Beach who stays in his unit several times every year. His annual income statement is going to show less income than the neighbor's identical unit that is available for rent during the entire year. The difference can be tens of thousands of dollars.

Imagine two identical units side by side each rented by different property managers. One manager charges 28% management fee and the other charges 20%. One manager, not necessarily the more expensive one, gets 20% higher occupancy. The net income difference can be significant.

A buyer who purchases a unit because it had a high net income may realize too late that he can't achieve that net because he can't manage as cheaply or as effectively as the previous manager. On the other hand, a smart buyer can buy a unit with a history of low net and turn it into a high net with higher occupancy and more efficient management.

Weekly rental vacation rental condos offer the greatest opportunity for a mix of personal use and income but prospective buyers need to be realistic with their expectations and know going in that very few units can pay all carrying costs from rental income if the owner is also occasionally using the unit. The timing and frequency of personal use can vary the net income drastically. An owner who uses his two bedroom oceanfront unit the month of March might lose $4500 in income but an owner who stays the month of October instead might lose nothing. A good buyer's agent will be able to guide buyers through the breakdown of seasons and strategies for maximizing income.

"I realized I might be lower on the social scale than I previously thought when the Real Housewives "Shabby chic" party looked exactly like my "dress nice" parties."  __Larry

Wednesday, June 10, 2015

Controlled Descent

The Cocoa Beach MLS inventory hit a major milestone yesterday. Most people involved in the market here are aware that inventory of properties for sale has been tight for some time but without knowing the actual numbers may not realize just how tight it is. Early yesterday morning the number of condos and townhomes for sale in Cocoa Beach and Cape Canaveral dropped below 200 units for the first time since records have been kept. Single family home supply has mirrored the decline in condos with current supply including half duplexes at 59 properties. Nine years ago there were 1200 condo units for sale and at drastically higher prices. A Canaveral Towers 2/2 unit that closed a couple of weeks ago for $247,500 sold in 2005 for $435,000.

To put current supply in perspective, the number of condos for sale this morning, 197, is the number of units that have closed since March 19 this year. Also of significance is the disappearance of distressed properties. There are just seven bank-owned units for sale and two short sales.

What now? Many of the sellers who were waiting and holding out for higher prices have been enticed back into the market although not at a rate high enough to keep up with demand. They'll continue to trickle onto the market but I don't think we'll see any significant numbers of new listings in the near future. The much-discussed "shadow inventory" being held back by banks has failed to materialize here on the beach. I don't think it ever existed in Cocoa Beach.

Sellers, if you've been waiting, come on in. The water's fine. Buyers, know what you want, what it's worth and move quickly and confidently when a target has been acquired. If you plan to get a mortgage, go ahead and do your preliminary work before looking at properties. Know that if you're rate shopping you may wind up with a lender who can't perform. With rates still very low, saving a few basis points might not be worth the risk of not closing. I can't remember a time in the past with so many mortgage delays and failures. A local lender always stands a better chance of successfully closing your loan.

Even with our tight supply properties are being bought every day at attractive prices still far below 2005-2006 prices. Over 200 buyers have successfully located and purchased a condo here in the last three months. We welcome new neighbors.

Buzzwords for the day: sunscreen, hydration, shark repellent.

How many bass players does it take to change a lightbulb?
None. The keyboard player can do it with his left hand.