Topic: Investor Series: Estimating Rents

A lot of clients ask me how to figure out what market rents are in a neighborhood. This is a critical input into the calculations an investor needs to make in order to determine what their return on investment will be on a rental property. So you don't want to screw this up! Unfortunately, this is one of the many figures new investors get wrong.

One place people go to get rents is Rent-o-Meter. Rent-o-Meter is billed as an online resource to get accurate market rents. In my experience it is anything but! However, I have a fairly simple solution. Multiply what you see on Rent-o-Meter by 80% and you'll probably be close. I can't explain why but I find rents on Rent-o-Meter to be about 25% high, so multiplying their rents by 80% will get you close (do the math, it works out).

So then, how do you get market rents? Simple: start at the subject property and drive concentric circles around the neighborhood. Call every For Rent sign you see (if you don't see any this is a good sign!). Interview the landlords. A subtle but telling sign is how polite the landlords are on the phone. If they act overly solicitous and desperate it's a sign that vacancies are high and they're desperate to get tenants - not a good sign for you. If they are breezy, abrupt, and even rude, that's GREAT! It means they have too many phone calls for their vacancy and it's a strong landlord market. This is what you want to hear!

In many neighborhoods around town today this is exactly what you'll find. I know. When the vacancy rate was 13% a few years ago I was very nice over the phone. Now that it's 4%...well, a little less nice. Nothing like good -ol' market research.

Denver 1Q 2008 condo real estate trends

Denver Board of Realtors – Trends Article – May 2008

Recap of First Quarter 2008 Condo Price Performance
By Lon Welsh and Michael Canon, Your Castle Real Estate.

The average condo price in Metro Denver decreased -2% in the full year 2005 to the full year 2006, from $190,000 to $187,000. Comparing 2006 to 2007, the average condo price across the metro dropped -3%, to $180K. Looking at the first quarter 2008 vs. the first quarter of 2007, prices dropped 4%, from $175K to $169K.

The average price of a foreclosure or short sale condo dropped from 2006 from 2007 by -6% to $108,000. The average price of a non-distress sale increased +2% to $211,000. Sales volume in January and February of 2007 was 1,316. In the same period in 2008, it was 1,223, or -7%.

Some areas did better than others. The attached chart shows different neighborhoods in our area. Each region has the neighborhood’s name and the percentage of sales in the last twelve months that were either short sales or bank-owned properties. The second line has the price change the twelve months from 4/1/2007 to 3/31/2008 vs. the twelve months prior. Next, you’ll see the average condo price in the last twelve months and the number of homes that were sold.

The good news: The average days on market for condos, in January to March 2008, was 108 days. This was a 6 day drop from the first quarter of 2007.

There had to be at least twenty sales in the last year for an area to be included. The numbers are more reliable in areas where there were more sales. Less expensive areas generally didn’t do as well. There’s a pretty strong relationship; where home prices are less expensive, there is more of a foreclosure problem, and that tends to drag down the prices.

Source: Your Castle Real Estate analysis, MLS data


Question or need more detail? Call Lon Welsh at 303 619 0633 or LonWelsh@YourCastle.org

(c) Copyright 2008, Your Castle Real Estate

Denver 1Q 2008 real estate trends

Recap of First Quarter 2008 Home Price Performance
By Lon Welsh and Michael Canon, Your Castle Real Estate.

The average home price in Metro Denver increased +2% in the full year 2005 to the full year 2006, from $309,000 to $317,000. Comparing 2006 to 2007, the average home price across the metro dropped 2%, to $311,000. The first quarter of 2008 was $278,000 vs. the first quarter of 2007 was $296,000: a 6% decrease. Note that prices in the first quarter are usually a bit less than the rest of the year. This is because families that tend to purchase larger, more expensive homes tend to move in the summer months when their kids are out of school.

The average price of a foreclosure or short sale dropped -3% to $188,000 from 2006 to 2007. The average price of a non-distress sale increased 5% to $370,000. Sales volume over the last twelve months is off -4% for DSF/ASF. Foreclosure and short sale volume is up +31%; non-distress seller volume is off 20%. This trend continued in the 1Q 2008; foreclosure volume was up another 15% at the expense of the non-distress sellers.

Some areas did better than others. The attached chart shows different neighborhoods in Denver. Each region has the neighborhood’s name and the percentage of sales in the last twelve months that were either short sales or bank-owned properties. The second line has the price change the twelve months from April 2007 to March 2008 vs. the twelve months immediately preceding. Next, you’ll see the average home price in the last twelve months and the number of homes that were sold.

The good news is that the foreclosures are likely to peak in the next six to nine months. Many of the foreclosures were due to resetting rates on ARMs (adjustable rate mortgages). There are two reasons. First, according to Bank of America data, the volume of ARM resets is set to peak in March 2008. It often takes six months or a bit longer for an ARM reset to conclude in the sale of a foreclosed home. Second, the index rates that many ARMs use have declined lately. As a result, some borrowers that might have had a huge shock if their rate reset a year ago might get less of an increase today. For these reasons, we’re likely to hit the bottom of this cycle this year.

There had to be at least twenty sales in the last year for an area to be included. The numbers are more reliable in areas where there were more sales.

Source: Your Castle Real Estate analysis, MLS data




Question or need more detail? Call Lon Welsh at 303 619 0633 or LonWelsh@YourCastle.org

(C) Copyright 2008 Your Castle Real Estate

A little more evidence we're past bottom of market cycle

Take a look at the first page, for AUN (Aurora North). Note these positive market trends this year:
- number of active listings steadily declining
- average list price pretty stable (finally!)
- U/C up dramatically
- Number of sales / month up (partially seasonality)
- DOM dropping
- Stability in average sold prices and sold price as % of list
- Sold price as % original price UP a lot – banks are getting better at pricing
- Number of expired listings down

Every indicator is improving this year in AUN. You will see the same trends in DSW (southwest Denver County), but not as marked an improvement as AUN.

By contrast look at DSE (southeast Denver County).
- listings are up (they should be – seasonality)
- Note the average list price ($758,000) is a lot higher than the average sold price ($418,000). Lots of expensive listings brining up the average ask price, but apparently they are not selling
- DOM (Days on Market) declining as it normally would due to seasonality
- Average price declining rather rapidly. Probably a mix issue – smaller, cheaper homes are probably selling better.

Since these homes in DSE are pricier, it has more of an effect on the “average” sales price on metro Denver. Oddly, we could see improvement led by the cheapo neighborhoods, with the lux neighborhoods falling behind for a while. It will be interesting to watch.

Denver, CO Fourth Quarter 2007 Home Price Performance

Recap of Denver Fourth Quarter 2007 Home Price Performance
The average home price in Metro Denver increased +2% in the full year 2005 to the full year 2006, from $309,000 to $317,000.

Comparing 2006 to 2007, the average home price across the metro dropped 2%, from $311,000. The average price of a foreclosure or short sale dropped in that time period -3% to $188,000. The average price of a non-distress sale increased 5% to $370,000. Sales volume over the last twelve months is off -4% for DSF/ASF. Foreclosure and short sale volume is up +31%; non-distress seller volume is off 20%. If you handle a lot of listing and the market seems slow, this is likely the reason why.

Some areas did better than others. The attached chart shows different neighborhoods in Denver County (email me for a larger version). Each region has the neighborhood’s name and the percentage of sales in the last twelve months that were either short sales or bank-owned properties. The second line has the price change the twelve months from 2006 vs. 2007. Next, you’ll see the average home price in the last twelve months and the number of homes that were sold.

There had to be at least fifteen sales in the last year for an area to be included. The numbers are more reliable in areas where there were more sales. For example, Wash Park West had 196 sales –the numbers are likely to be very reliable. In Lincoln Park, with only 41 sales, the numbers are more likely directional.

Less expensive areas generally didn’t do as well. For example, Westwood (average home price $100K) saw a 20% drop in prices. More expensive areas generally did better. For example, Hilltop (average home price $961,000) was up 15%. 81% of the sales in the Westwood area were related to foreclosures, where in Hilltop, only 11% were foreclosures (up from 9% last quarter). There’s a pretty strong relationship; where home prices are less expensive, there is more of a foreclosure problem, and that tends to drag down the prices. Another factor driving home price appreciation in some upscale neighborhoods are re-sales of recently scraped properties, where a small, run down $300,000 home is replaced with a new home at $1,000,000.

Source: Your Castle Real Estate analysis, MLS data

Welcome to the Denver Real Estate Blog

I'm the managing broker of a 105 Realtor firm in the Denver Metro area. We do a lot of research on the trends that drive our market. Stay tuned for posts about what has happened to property prices and what will happen next. I hope that you'll find find it interesting - and if you are considering a move, you'll be able to use the insights to guide your transaction.