Why is nothing selling in Worcester? Multifamily edition

Everyone has been asking me the same question, "Why hasn't anything been selling?"

There is not a simple answer but let me try to explain.

First we have to analyze the motivations of the sellers then the buyers.

Sellers have an asset which hopefully makes them money, and hopefully has some equity.

The seller has to decide that they will part with this asset.  In order to do so they need to have one of the following happen:

• a.  Wake up one morning and not want to be a landlord-(this happens all the time) their time is more valuable somewhere else
• b.  Die- this happens as well
• c.  Decide they would rather take the equity from their property and deploy elsewhere
• d.  Have an opportunity to trade up (1031) their property

From this list a. is most likely to happen, d. is most unlikely.  Let's take a. and c. for example.

Multi owner decides if she could have $100k in his pocket she would sell so he prices the property accordingly.  If that price is incorrect(market does not support it) she won't sell.  Sometimes she is willing to take less if she a. - woke up and decided not to be a landlord.  This is the best opportunity to get a deal done.  In the case of c. a lot of these sellers just sit on the market waiting for the "right buyer"

Now let's take the Buyer side:

• a. They need a house and are currently renting
• b. They want to invest in Real Estate instead of other options
• c. They are redeploying capital with a 1031 exchange

For buyer a. if they have the down payment, there are still houses out there where they can pay less to purchase than to rent, but they are few.  Buyer b. isn't very motivated and they are sitting around waiting for a deal.  Buyer c. is sort of tied to the timeline of the 1031 and needs to buy something so they are snatching up things that might not be a deal, and they serve to keep prices higher then they should.

Everyone says to me something like this, "I take this money out of my pocket but I don't make any money on the properties as these prices". Sadly I agree.  However, real estate is about the future as well.  If you put your $100k in the bank at now high 4% rates you will have $104k at the end of the year. at the end of 5 years you will have $121,655.

Imagine that you need a place to live and your rent keeps going up every year and you can take $25k (if you have it) out of your pocket and buy a $500k property and your rent stays the same and you use the other rents to pay the rest of your expenses would you still do it?

Now imaging you take $100k out of your pocket and buy a $500k multi and you can pay all your expenses and make $0 every month.  Why would you still buy the house?

The reason you still buy in the first case is the because:

• You want to own your house
• Gain equity
• protect yourself because you think rents are going up
• opportunity for wealth since you think home prices are rising

The reason the investor buys case study 2

• Rents will go up and you will get cash flow
• the house will go up in value

On top of this you also in both cases get:

• Preferential tax treatment with write offs for expenses and mtg interest and depreciation

Now take that same $500k house, imagine that home prices go up 20% over a 5 year period, this is not a stretch, and remember you are in this for the long haul.

Now your house is worth $600k, $100k more than you paid

For the owner occupant who was paying the same as renting they have taken $25k and turned it into $100k a 400% increase, that is crazy!!!!

The investor took $100k and doubled their money so 200% increase, let's leave off transaction costs but this is $78,345 more then they would get in the bank.

Simply put, there should still be transactions going on and people should still be putting $ into real estate if they plan to own for the long term.

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