How to Predict a Real Estate Price Dip

Transcript: 

Jack Butala:                       Jack Butala with Jill DeWit.

Jill DeWit:                           Hi.

Jack Butala:                       Welcome to our show today. In this episode, Jill and I talk about how to predict a real estate price dip. That’s a nice way to say it, price dip, versus catastrophic downturn is how I would have written it but I didn’t write the title of this.

Jill DeWit:                           Love it.

Jack Butala:                       Before we get into it let’s take a question posted by one of our members on the landinvestors.com online community. It’s free.

Jill DeWit:                           Okay. Kevin asks, “Do you look up the zoning before buying, or ever?”

Jack Butala:                       100% of the time I do.

Jill DeWit:                           I do too. You know what, I try to do it right at the head of time too when I’m downloading the data, I’m including the zoning for the properties that I want. I’m not going to put in there any federal land or, I don’t know, anything crazy in there. Industrial. I’m not going to include that in my data set when I’m downloading it. You better believe before I pull the trigger I double-check it and make sure it’s residential or something like that.

Jack Butala:                       Jill and I just released a website called parcelfact, F-A-C-T.com ,and it’s literally, you type in an APN or assessor’s parcel number on any property in the country, you know, the state, country APN, and it pulls up all the assessor data, including a map with the corner points and everything. And one of the things on there is zoning.

Let me tell you a real quick story. If somebody signs a letter for a one acre property that you send out, signs an offer and they send it back, it’s like opening a gift at Christmas for me. And then, if the zoning is like RV over like single-family residential or mobile home, then it’s like that’s the cherry on top of the cupcake. Because mobile homes are gold in our business. Mobile home lots and RV lots are gold in our business.

Jill DeWit:                           Exactly.

Jack Butala:                       Not only do I look it up before buying, I look it up right when we’re making a decision whether or not to say, “Heck yes.”

Jill DeWit:                           It’s too easy to look at that all at the same time when you’re doing your due diligence. You’re pulling up the zoning, you’re checking where they stand on their back taxes.

Jack Butala:                       It’s too easy.

Jill DeWit:                           Is there an HOA? All that good stuff. Are you recording me?

Jack Butala:                       No, I believe it.

Jill DeWit:                           I’m like “Are you making fun of me?”

Jack Butala:                       No, you have a natural ability to make things in less than one sentence, really make sense.

Jill DeWit:                           Oh, thank you.

Jack Butala:                       And I have a natural ability to complicate the hell out of everything.

Jill DeWit:                           What’d you just say?

Jack Butala:                       It’s too easy.

Jill DeWit:                           Thank you.

Jack Butala:                       It’s too easy to just look it all up all at once and get excited or throw it away.

Jill DeWit:                           Check all the boxes, now I’m going to get serious about it. That’s what I do, Kevin.

Jack Butala:                       If you got a question or you want to be on … You should have a list of stuff that you look at before you buy and check it off.

Jill DeWit:                           I do have a list.

Jack Butala:                       I know you do. You listeners should have a list, no you, Jill.

Jill DeWit:                           Exactly. When it’s you acquisition criteria.

Jack Butala:                       If you have a question or you want to be on the show, reach out to either one of us on landinvestors.com. Today’s topic: how to predict a real estate downturn or price dip, or depression. Like we just came out of a real estate depression, not a recession. This is the meat of the show. What do you think, Jill? What are some indicators that you look at?

Jill DeWit:                           Well, it was interesting to me because I pointed this out in the back … Well, this came up as a discussion in the back of a cab the other day. This guy, we were just kind of chatting and he was kind of was asking what do you do? And I was basically saying I buy and sell a lot of land, you know, a lot of properties. And he’s like, “Oh, can I ask you some questions?” “Sure.” He’s like, “Do you think that we’re almost to the top pricing, and how do you know when it’s a really bad time and a really good time,” kind of thing. So I talked about it with him and my overall, you know, message was I don’t care. Because my spread stays the same. So, Jack’s going to get more into how you predict it. I watch the other product types, like housing number one, and for my land, usually becomes behind all of that stuff. So I’m keeping an eye on all that. But overall I don’t worry about it because my spread will stay the same. I might be spending more and selling it for more at some times. Or I might be buying it for less and selling it for less. But I’m still going to make my X amount percentage in the middle there.

Jack Butala:                       Well said.

Jill DeWit:                           Thank you.

Jack Butala:                       Here’s how Jill and I live our lives. If I wake up tomorrow morning and I make half, top line revenue, half of what I made the day before, it will not affect our lifestyle. And I learned this the hard way during the last downturn because we had a tremendous amount of assets that we were selling that we purchased for cash and that we owned outright. And the market seemed like it was over night. Well, it turns out the markets don’t change over night. That’s what this show is about, this episode. There’s a lot of indicators, that now, with a little bit more wisdom, I watch all the time so that I can basically predict when this is going to happen within reason. You can’t predict the day, but you can pretty much predict like a quarter. The financial quarter, the fiscal quarter that’s going to happen. And I’ll share them with you.

I microscopically watch entitlement applications. What the hell is that? Entitlement applications are out west here. When you want to do a subdivision. When a large home builder like, let’s say Shea homes or Toll Brothers, these are huge home builders and they do master planning communities in Phoenix and Los Angeles. I just read that Phoenix is the single, largest growing city in the country.

Jill DeWit:                           Seriously?

Jack Butala:                       Yeah, number one.

Jill DeWit:                           That’s awesome.

Jack Butala:                       Number two is something in Florida and number three is Las Vegas. Because they have the real estate that just completely keep going outward. Anyway, if you watch entitlements, which is the application process for these home builders to subdivide land to build houses on, they’re going to start to dip. And end over end, month over month, if they really start to go down that’s a huge indicator. You may not notice it in your land business at all. It’s a massive indicator that something’s coming.

You also want to watch commercial occupancy rates go up or down. And I mean specifically office buildings and industrial buildings. I don’t mean apartments. When people start not paying their rent … long before they stop paying their mortgage or something horrific like that happens, they will stop paying their office rent. And that’s a real good indicator that something’s going on. And I don’t mean a little blip. It’s going down. Month after month after month it’s going down. That’s a massive indicator that something’s coming.

If you watch the zero down mortgages, like right now there’s these new products that are coming out, and they’re not new at all, zero down, three percent down mortgages, that’s a huge indicator that there’s going to be a problem because people are buying houses they can’t afford.

Jill DeWit:                           I was going to say that. I keep an eye on interest rates, too. It ties into that.

Jack Butala:                       New car sales. Right now Detroit’s having some of the best car sales they’ve ever had in the history of car sales. When that starts to go down, there’s going to be a problem.

What’s last is land for some reason. And I never understood this. And I mean lower priced land. Like buying a 40 acre property for $8 to 12,000. Fortunately for us, we’re last in line so we can predict a lot of this stuff. I’m not talking about a Santa Barbara ranch for 1.7 million bucks. Those properties, that ranch, and for the most part the properties that we deal in, are cash sales. We don’t leverage anything. We might get like a home equity loan to buy some property, but that’s not the norm. And so, we’re always in a good position because we own this assets outright.

\So, again, during the downturn, Jill and I got our butts handed to us. And here’s why. It was not so much that the market failed or we did anything wrong, we relied exclusively on one channel of sales; Ebay. And that is what really crashed, not the land sales business. And we recovered just fine.

What ends up happening, and like Jill said, is you just buy it for a little bit less and then sell it for a little bit less. People are really willing, when they need money, to sell their property to you. So that’s the time when you really can shine.

And then, there’s always people with money that want to take advantage of the situation and you can sell it.

Jill DeWit:                           Yeah, you’re right. You just brought up a whole other topic. When the market is down, there are a lot of us that jump on that opportunity. Great, now I can afford to get into that area. Congratulations. You know, I hate to use Katrina as an example. But off of Hurricane Katrina, which was a horrible thing, but I remember being in New Orleans six months or a year after that and people were talking about, you know, we can now afford to live in the area that we always wanted to live in. You know what I mean? Because of the situation people were moving away and it really messed up the real estate world.

Jack Butala:                       I personally refuse to … I’m not a storm chaser.

Jill DeWit:                           No.

Jack Butala:                       You know what, when that happened, people were asking me about that. And that’s way beyond [crosstalk 00:09:17].

Jill DeWit:                           No, we don’t do that. But I’m just saying, what I would do as an overall business model, when prices are down and I can afford more, am I going to buy more? Heck yeah.

Jack Butala:                       Here’s an example. Right now we pay … Let’s use Mojave County, Arizona as an example, which I always do. We regularly purchase 40 acre properties in that area, let’s say northern Arizona, for $4 to $6,000 right now, then sell them for cash, for I don’t know, 10 to 12. Regularly. And so do the members in our group. During the downturn we were buying 40 acre properties for $2,000 up there and selling them for four. And we were doing it less frequently, truth be told. But we were still doing it. And we didn’t change what we ate. Was it yippee ki yay, we’re having a blast like it is right now, no. Were we worried? Hell yeah. But we were still eating.

Jill DeWit:                           Exactly.

Jack Butala:                       And there are lot of people that weren’t during that time. There’s a lot of things you can do and it’s probably a topic for another show, to really diversify your risk. And one of them, and I know this from experience because I made a massive mistake, is using all the sales channels that are available to you. We had all our eggs in one basket with Ebay and it was tough. And it forced us to rethink the whole thing and create a better website, LandPin. I mean out of that came Land Wash, Land and Farm, LandPin and-

Jill DeWit:                           All the other things that we do now.

Jack Butala:                       Craigslist and Zillow and Trulia. You got to post it everywhere.

Jill DeWit:                           Exactly.

Jack Butala:                       It will sell. No matter how bad it gets, people love cheap real estate.

Jill DeWit:                           Totally.

Jack Butala:                       I’m one of those people.

Jill DeWit:                           Exactly.

Jack Butala:                       Not Jill though, she’s just here for the entertainment.

Jill DeWit:                           I am.

Jack Butala:                       She doesn’t like to make money at all.

Jill DeWit:                           No. Not at all. I’m here to talk to people all day long and offer more than I think it’s worth just because I like to talk.

Jack Butala:                       Hey, sarcasm.

Jill DeWit:                           Just kidding.

Jack Butala:                       Join us in another episode where Jack and Jill … where Jack talks too much.

Jill DeWit:                           Oh my gosh.

Jack Butala:                       And Jill sits there.

Jill DeWit:                           Yes, and paints her nails and use inspiration. Because that’s me.

Jack Butala:                       Take just about anything you want.

Jill DeWit:                           We use it every day to buy property for half and sometimes less of what it’s worth and sell it immediately.

Jack Butala:                       You’re not alone in this predictable real estate market ambition. This stuff is not that, you know … you really break it down. You can see what’s going to happen in the future.

Jill DeWit:                           Yeah, you can.

Jack Butala:                       [inaudible 00:11:47] about data, when you really look at this from a big picture, you know what’s going to happen.

Jill DeWit:                           Yeah, there should be no surprises.

Jack Butala:                       There is no surprises in any of this. Do you know what people get really hung up in real estate is they buy a property and they put it up for sale and they wait to see what’s going to happen.

Jill DeWit:                           Right.

Jack Butala:                       Don’t do that. Please don’t do that at all. I see new people on BiggerPockets doing that all the time. “I don’t know. It’s not selling.” Well, you didn’t do your homework. You paid too much.

Jill DeWit:                           Exactly, or you’re not putting it in front of the right people or enough people.

Jack Butala:                       Yeah, or you mortgaged it. You mortgaged too much of the property so now the bank’s telling you what the price is and not you.

Jill DeWit:                           Exactly. Bingo.

Jack Butala:                       Information and inspiration to buy undervalued property.

If you enjoyed the podcast, please review it in iTunes . Reviews are incredibly important for rankings on iTunes. My staff and I read each and every one.

If you have any questions or comments, please feel free to email me directly at jack@LandAcademy.com.

www.landacademy.com

www.landpin.com

I would like to think it’s entertaining and informative and in the end profitable.

And finally, don’t forget to subscribe to the show on iTunes.