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Real Estate Investor University Newsletter

                     "News, Information and Education for Real Estate Investors"       
Created and Published by Donna Robinson            
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"Resort Investing - Hot Markets and Hurricanes..."

A guest article, written by Candace Tanner, Destin, Florida

This week I am happy to bring to you an article contributed by an investor friend of mine, Candace Tanner. I first met Candace when she lived in Atlanta, and contacted me for some consulting and advice. Candace was a "newbie" real estate investor when she moved to Destin, Florida in the spring of 2004. Little did she know she was in for one of the worst years on record for hurricane season in Florida. Her story is a great glimpse into the uncertainty and success of real estate investing on the coast. 

 When Donna Robinson asked if I would like to write an article about real estate investing in a resort area, I was pleased to tell my story, but was concerned about admitting that I had not followed any of the rules I had learned during the many real estate seminars I took while living in Atlanta.

After taking an early retirement package from a large corporation three years ago, I took several real estate investing workshops at GAREIA and seminars from well-known real estate investment gurus with the hope that I was launching an exciting new career. We were living in the Atlanta area at the time, and I just couldn’t find the courage to start an investment program. After working for large corporations for 32 years and getting that steady paycheck, my fears of uncertainty really kept me from even making a first-time real estate purchase.

We moved to Florida this past summer, (2004), at the encouragement of family and friends who had moved there in 2003. Our friends had also taken real estate investment courses in Atlanta before they moved here and began investing in the local market. They pointed out that for real estate investing, the Florida Panhandle is a very hot market.

The Emerald Coast area of the Florida Panhandle runs approximately 100 miles from Pensacola to Panama City and attracts hordes of tourists who enjoy the pristine white sand beaches, emerald green water, excellent fishing and local attractions. The seasonal cycle for the tourist trade is opposite of South Florida where the draw is warm weather in the winter months. Here, the tourist season begins with Spring Break and peaks in July.

We live and invest on Okaloosa Island, a tourist destination between Fort Walton Beach and Destin. The island is a narrow finger of land positioned between the Gulf (beach side) of the island and Santa Rosa Sound. The Gulfside beach has about 1-1/2 miles of condo buildings and three hotels. The Sound side of the island has some condos and a few single-family homes on the water.

What I’ve learned over the past few months about real estate investing has been much more than I could have imagined! After all those tapes, workshops and expensive seminars, I found that finding and closing deals hasn’t been anything like what I had studied. 

Negotiating in a hot sellers’ market where multiple offers come in on a property is not the same as using Maximum Allowable Offer (MAO) formulas to position an offer in a buyers’ market. Here, a buyer has to be the first in line with a contract at the seller’s list price and hope for a quick acceptance or compete with other buyers who might be bidding above asking price. The competition is fierce for beach and waterfront properties especially during the Spring buying season, but there are homes in established neighbors in the local towns that are still affordable. There are pockets of older condos on the water (long-term rentals) that are available at reasonable prices, but the newer condos and townhouses are in big demand at high prices.

Since condos have appreciated faster than single-family homes, we began our investment adventure by buying a condo on the beach. I had never invested in beachfront property so the first hurdle was getting over high price sticker shock.

 One-bedroom condos start at $ 300,000 - on the low side. We found a 2-bedroom 2-bath condo with a beautiful view of the beach and sound for $ 350,000, and learned that there was a contract in place from an out-of-town buyer.

 We were advised by a realtor to put in an offer, just in case the first contract fell through. To our great surprise, the seller countered with a higher price on our back-up offer! The seller decided to jump at the chance to accept a higher offer price, while the out-of-town buyer burned up valuable time and ultimately lost the deal due to an inspection contingency in his offer. 

So the investment strategy here was to secure a property with a contract, buy with no contingencies, and do your best to mitigate negative cash flow until appreciation takes the market to your desired selling price. I have been able to keep our beach condo rented most of the time, offsetting mortgage payments with rental income, but during the winter months especially, an investor has to expect negative cash flow. We discovered that you have to be aggressive to take advantage of a hot market. 

Our latest investment was an 800 sq. foot 2 bedroom, 1 bath condo on the main street of Okaloosa Island. It was an older condo built in 1981, and the outside of the building needs cosmetic work, but my husband happened to be driving by and saw a small "For Sale by Owner" sign on the outside railing so we pursued the deal. 

To our delight, it had been rehabbed by the electrical contractor owner who had rewired the unit, replaced the appliances and added a washer/dryer connection in a bedroom closet. As the asking price was $110,000, we engaged our realtor broker to help us make an offer on the condo. After learning from our first experience that there is very little time to evaluate a deal before other buyers catch on, we didn’t waste anytime getting a contract in place.

 This condo is not a beachfront unit, but just across the street and is in easy walking distance to the public access boardwalk. At $110,000, it was a great buy, and our intention was to hold it for a long-term rental. The mortgage company required 25% down payment so the low monthly payments plus the Homeowners Association dues of $150/month, made the deal a breakeven cash flow, assuming $ 650/month rental income.

I interviewed a property rental management company to get a feel for the rental rates and was told that $800-900/month was doable even though current renters in the building were paying $600/month on long-term leases. In hopes of getting a good tenant, I asked Donna for tips on putting together a lease purchase deal and placed an ad in the newspaper.

 Surprisingly, just a few calls came in and since we were asking for an initial $5,000 down payment/$149,000 sales price due in 1 year, no one who looked at the unit came close to making an offer. I offered to accept the $5,000 down payment with an initial $2,000 deposit and the balance in 3 payments throughout the year, but all the prospective buyers were credit-challenged and lacked cash.

In the midst of this, hurricane Francis had passed through the east coast of Florida, and hurricane Charley was approaching fast. Little did we know that yet another hurricane -- Ivan, would soon be on the way. Charley was a close call, and it seemed to have affected the local market a bit, slowing things down, and scaring off some renters. I was concerned about the weather and it's effect on the local market, but we continued with our investment activities. 

Next, I invited another property rental management to come look at the condo and to review their rental policies and fees with us. The rental agent thought that the condo was in such good condition that he advised us to resell instead of renting and taking the chance that tenants might damage it. 

At the advice of an investor friend, I ran ad in the local newspaper with a selling price of $159,000 and spent the weekend before hurricane Ivan hit, showing the unit. On Monday, we had two verbal offers – one at $150,000 with $5,000 down in earnest money. The other prospective buyer knew that hurricane evacuation orders were going to be issued within 24 hours so she indicated that she would make her offer after the storm had passed.  

Hurricane Ivan hit the Panhandle on September 16, destroying many first-floor condo units on the beach with a strong storm surge, ripped off roofs everywhere and caused heavy damage to many of the older homes. While the destruction was not as severe in our immediate area, after the storm we immediately lost all of the normal fall tourist trade. 

 As fate would have it, the hurricane caused extensive damage to the condo building –  blowing the roof off in places and destroying the 4 upstairs units. (The building is 3 stories, with 4 units on each floor.) We had expected that the storm surge would destroy the 4 first-floor units, but the strong Category 3 winds had caused the most damage to the roof and top floor. Since our condo was on the 2^nd floor, the rain had been driven through a bedroom window and water had ruined the carpet and sub-flooring. Otherwise, we were spared extensive damage.

One of the buyers came back to see the unit again and offered $149,000 after viewing the soggy floor and carpet in the front bedroom. Looking back now, I might have panicked a little because I accepted the offer and set about making repairs. 
Interestingly, we had bought the condo on August 30 and had a signed buyer’s contract on September 30 – so even with hurricane damage – a roof with holes, the top floor units destroyed and debris all over the Island – we had a nice profit of $39,000 in a very short time! Still, it was quite an emotional roller coaster waiting for hurricane Ivan, and wondering what would happen. 

My return-on-investment calculation (ROI) shows a 93.5% return on our initial cash outlay. I believe that it was the condo’s location (across the street from the beach) and its updated condition that, despite the building and carpet damage, made the quick sale possible. In fact, we learned that the appraisal had come in at $ 170,000 – and, I spent a few days wondering if we had accepted an offer that was too low. Of course, the buyer was delighted, and I eventually came to the conclusion that a quick sale and happy buyer was a good thing, especially under the circumstances.

So, here are a few things that I’ve learned over the past few months about investing in real estate resort-area property:

 -  To be sure that I can cover lost rents for any reason, if necessary (budget for unexpected expenses)
-  Not to put all my eggs in one basket by buying properties in one location
- To act quickly by getting a contract in place when we find a "deal" on a property
- To have a good relationship with our lenders and approvals in place to facilitate offers
- That real estate investment techniques vary by local and current market conditions
- That real estate investing seminars can deliver some good ideas, but nothing takes the
    place of the investment experience
-  Not to bother staying awake at night going over and over deals because not much
has worked out the way I thought it would
-  And much more, I'm sure!

The topic of real estate investing in a resort area is far more extensive than what I’ve discussed in this article. Opportunities 
include beachfront condos, retirement homes and popular pre-construction deals for town homes/condos. So much to learn, 
and right now at least, it’s fun to invest in a hot market.

Anyway, on to the next deal! We’ve been looking for the past 3 weeks for a new condo investment, so here we go again…..

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        The successful and the lucky have something in common - Persistence
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Hot Markets and High Prices -- The article above documents the unique perspective of a real estate market so hot
that even full price offers may not be accepted. Resort property is rapidly approaching a unique point in American real estate
history. As the baby boomers approach retirement age, their focus has turned largely to resort and retirement property. 

A rare combination of a large number of retirees, and very low interest rates has created an unprecedented demand in the  
coastal areas, all across the warmer regions of the U.S. This is truly one of the most unique trends ever documented in
real estate investing. It ranks with the post world war II real estate development frenzy, which took off after the GI's came 
home from the war, got married and started the "baby boom". 

Candace Tanner is one of the smart investors who has positioned herself to ride this wave while it is rolling along.  

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About the Author and Publisher of Real Estate Investor Weekly...

Donna Robinson is an investor, author, speaker, and publisher of books and numerous articles on real estate investing.  
A subscription to this newsletter is available at her website, http://www.realestateinvestoruniversity.com 
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Copyright Donna Robinson - GHP Publishing, 2004 All rights reserved.
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