Investors Left in the Cold in Washington, DC Real Estate

By Melissa Terzis, Realtor, City Chic Real Estate, Washington, DC:

We receive a lot of inquiries at our downtown Washington DC Brokerage from investors looking for a real estate windfall. The sarcastic side of me wants to tell them, “Aren’t we all?”

As far as finding an investment in this market? Don’t do it.

Smart investors know: to be successful you have to follow two simple rules: Buy low and sell high. But for every smart real estate investor there are about a dozen who weren’t so lucky. But all clients believe they are going to be the one – the smart investor who flips a property for tons of cash.

It’s all about timing. And the time for investing in residential real estate in DC has passed.

The market here has already pushed prices far above where many of us in the industry expected them to go. It’s still saturated with buyers who think nothing of escalating tens of thousands of dollars over list prices. There are no more good deals. But people don’t believe me.

I blame the media, and I blame the home improvement shows. The news of the real-estate market in DC has long been frothy, citing a plethora of jobs here, a robust economy, and generally painting the city as a home run for real-estate investment. And home improvement shows make renovating look like a piece of cake. Yes, two hot guys are dying to custom-renovate your home into a luxury abode for a cost of a few bucks to you and zero profit to them.

The calls usually come from area codes that are far from DC. This is how I know we have another believer who just finished reading an article in their local business paper about DC and how great it is. Now they want to plunk down some cash and enjoy huge returns in a relatively short timeframe.

The callers always say the same thing. They want “a great deal, in an up and coming neighborhood,” where they can “have a positive monthly cash flow and sell for a profit in a few years.” And they “don’t mind doing some work.”

They are not the first, nor the 10th, nor the 1000th person to think of this brilliant idea. I don’t like depriving people of hope, but a dose of reality comes next. It usually boils down to this:

  1. Do you know anything about this market? No? Well, you have tons of competition.
  2. You will not be able to compete with buyers here who are escalating sometimes 25% over asking prices.
  3. Were you living under a rock in 2002 – 2005 when the steady reduction in interest rates resulted in a huge bubble? Did you block out the ensuing years of misery? It took many people in DC close to 10 years to recoup their investment from the early/mid-2000s.
  4. There is no such thing as an “up and coming neighborhood” in DC anymore. Every single neighborhood has jumped on the redevelopment train or has plans in the works for it, save a few neighborhoods that may not see redevelopment for a decade or more.
  5. Stop looking at homes as investment vehicles. If you find an agent who guarantees you a profit in a few years, they’re lying.

There are no big secrets here. What I know is what everyone knows.

There is a desperate, scrappy pool of buyers in DC who need houses and who will stop at nothing to get them. Competition is tough. Homes listed in hot neighborhoods get up to 20 bidders in many cases. If you’re the winning bidder of a multiple bid situation guess what?

You paid too much!

So the investor looks to the “overlooked” neighborhoods – the places where no one is clamoring to live but where there are rumors of future development and change. They don’t realize there’s a cost to a purchase here that far exceeds the price.

Owning a property in a neighborhood where prices are low, on the hopes that one day Whole Foods will build a store on that empty lot across the street while you contend with a lack of amenities and a lack of suitable tenants who pay their rent while you wait for the market to catch up to you? That’s not a very promising investment. Nor is it fun to endure. Unless you like replacing your stolen copper wire or busted windows on a weekly basis.

I had an out-of-state investor call me to explain he had purchased a 4-unit apartment building in one such neighborhood; he’d heard the neighborhood was hot. He purchased 3 months prior to our call, bought some supplies to renovate the apartments, didn’t finish, and now wants to sell for a 20% profit.

He paid $500,000 and wants to sell for $600,000. The justifications were comical.

I asked what value he’d added, i.e. did he get any of the units leased? No. There were tenants in 3 of the 4 units paying $300, $500, and $600 in rent, respectively. I asked if he knew those tenants had tenant’s rights. He couldn’t just throw them out to renovate and raise the rent. There are protections in place for tenants for that very reason. He didn’t know that either. He thought that a trip to Home Depot for some supplies and the passage of 3 months’ time in the Golden Land of Washington, DC was enough to squeeze a cool $100,000 out of the building.

I asked him if he understood that in DC, investors seek a cap rate between 6-8 and his was 29, that it would, in effect, take him 29 years to pay off his investment. He asked what that meant. I said, “It means you overpaid.”

He went silent. Then I heard him whisper to his partner, “She says we overpaid.”

I asked what due diligence he’d done to determine that the property was worth $500,000 when he bought it.

“That’s what they were asking,” he said.

There are more out there like him. Many more. I guarantee it. When some areas of the country start crashing, we’re going to find out, again, just how many speculators there were. By Melissa Terzis.

American consumers, after years of post-financial-crisis struggles, finally saw some light at the end of the tunnel. But suddenly, it all starts to crumble again. Read… What the Heck Has Suddenly Hit American Consumers?

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  9 comments for “Investors Left in the Cold in Washington, DC Real Estate

  1. Mark B
    Feb 25, 2015 at 4:25 pm

    I remember a conversation over lunch at a tech company I was working at in 2007 (all engineers at the table, so reasonably good salaries) and one of us (‘Bob’) was thinking about buying a house in the Portland area but was concerned over price (+$500k). One of the other guys at the table (‘Ed’, a property speculator who’d flipped a couple of houses) said “what are you worried about, you’re in the 90th percentile in income, you can afford it”.

    I pointed out that this meant only 10% of the population could afford to buy it from him when and if he decided to sell. Ed just didn’t get it but Bob did and passed on the house.

  2. NOTaREALmerican
    Feb 25, 2015 at 5:41 pm

    If it wasn’t for the pathological optimists, the cavemen never would have left their caves and speculated on cave-flipping.

    Dude, what can go wrong dude?

  3. Petunia
    Feb 25, 2015 at 6:40 pm

    I looked at a house in south FL one half block away from the garbage dump, 330K. Even in a better area it would have been overpriced.

  4. williamwilliam
    Feb 25, 2015 at 8:13 pm

    I’m guilty of recent speculation. I’ve been working in another state and rented a room until I was booted when the lease ended. I bought a condo in Northern California Jan’14 which was increasing in value $10k per year…. except for the first year I owned it. Granted, I’ve had my own place when in CA and used airbnb to earn nearly $5k when not there. But property price appreciation may not come that easy. I can still keep it as an non-leveraged investment with 6-8% annual returns after expenses.

  5. Mary
    Feb 26, 2015 at 1:34 am

    The American dream has passed, wake up people, it is the time for the Washington dream.

    You know the federal government is too big when the zip codes in and around the beltway surpass manhattan, bay area, Hollywood or Beverly hills in terms of wealth. Apparently, creating regulations is far more lucrative business than creating software, machineries, entertainments.

    We have reduced to a country of politicians, regulators, bureaucrats, welfare recipients, whiners and, well, agents.

  6. Julian the Apostate
    Feb 26, 2015 at 3:02 am

    Or cringe when your load takes you through there. Or worse yet, delivers there.

  7. williamwilliam
    Feb 26, 2015 at 6:51 am

    Zillow real estate data of Arlington, VA is not impressive. Real estate values sunk from around 2005 to 2010 and have creeped back up since then. However, Zillow estimates many home values will decline in the next twelve months. Turning a SFH into a rental is only cash-flow positive with about 40% down, according to Zillow purchase and rental data.

    • Feb 26, 2015 at 1:07 pm

      You can’t tell anyone in the Arlington market this though – they’re seeing houses come on the market and go off within minutes, and things sell without even going on the market at all, at least north of Route 50. It’s truly astonishing to watch because where does it end?

  8. Alan V
    Feb 26, 2015 at 8:09 pm

    Speaking of South Florida, the insanity that has once again gripped Miami is something to behold. It’s like everyone is telling themselves 2007-2010 was a bad dream, never happened. Condo towers with absurd amenities and price points are going up EVERYWHERE, ultra luxury shops opening in the Design District (which just 2-3 years ago was a wasteland), it’s like the 00’s bubble on crack. But a slight difference…90% of pre-sales are to foreign nationals, and 70-80% all cash. It’s doesn’t take a wizard to get that at some point this money and these buyers will just evaporate overnight, and do you think all this volume can be absorbed by selling to Miamians needing a mortgage? This will be a blow up for the ages when it hits.

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