Log Cabin Blog

On my website, www.willquinn.com , I make the point that if you are buying a cabin in the Smokies that you intend to rent when you are not using it, “you are buying a small business, not just a second home”. With any business there are many factors necessary for success and that is especially true for your nightly rental cabin in the Smoky Mountains.

I discuss all the critical factors for profitable cabin ownership in my “Buyer’s Guide” (you can click on the link to my site to get one) so I don’t need to enumerate them here. My point here is that if part of the money you spend on a cabin purchase is compensation to a real estate professional, choose an agent who understands all the details that have to be in place and accounts for them.

Before I put a property on the “Featured Properties” page of my website, I analyze that property to determine its potential for successful operation. I work with top management companies to quantify their requirements for that specific cabin to be accepted on their program, develop cost estimates to accomplish the necessary upgrades and identify the best local sources for the required goods and services.

If you are going to be paying a professional to help guide you to a profitable and personally fulfilling cabin purchase in the Tennessee Smokies, buy the whole package. Working with me will cost no more than working with someone only interested in showing their listings, writing a contract and closing it but your experience will give you the confidence of understanding what you need to do and why in order to fulfill your dream of owning your own mountain retreat that improves your quality of life and helps improve your financial future.

When short sales and foreclosures first became a factor in real estate transfers in the Smokies at the end of 2008, NOBODY was prepared for it. Real estate agents, buyers and sellers didn’t fully understand them and the lenders did not have protocols and procedures established. Consequently, many potential buyers spent a lot of time and experienced pain and suffering for nothing. Most lenders now have systems in place for short sales and foreclosure sales so they have become more routine with faster lender response time and faster closings.

That being the case, I’ve become a fan. Short sales and foreclosures are not the answer to every buyer’s prayers, but with careful analysis, incredible opportunities are waiting.

Choosing wisely is the key to success in dealing with short sales and foreclosures. What you should be looking for is not a distressed property but a quality property with a distressed owner. When you go to the “Featured Properties” page on my website, www.willquinn.com that is what you will find. I’ve chosen cabins that are not a short sale, foreclosure or an incredible deal because they are in a poor location, have no view or have major structural problems but because the owner is financially distressed.

In many cases (especially foreclosures), you will need to be prepared to completely refurnish the cabin or at least do some upgrading of the furnishings. A complete refurnish can cost $10,000 to $25,000 on a typical 1 to 3 bedroom cabin but there are properties (mostly short sales) that will only need $3,000 to $7,000 in upgrades to insure optimum income.

I have found successful strategies for constructing offers on foreclosures and short sales. On a foreclosure, I recommend low balling on the offered price. In a foreclosure, the seller is a bank and the subject property is just an item on their ledger that they want to remove. They know they are going to take a loss on the property and the amount of the loss they are willing to take can only be determined by pushing them. They may go a lot lower than common sense would dictate.

There is less play when making an offer on a short sale. Lender approval is required and since they are likely giving up the right to obtain a deficiency judgment against the seller for any loss, they are going to be less negotiable.

Finally, a preapproval letter for your proposed mortgage or proof of available funds on a cash offer MUST be presented WITH your offer for it to be considered.

I checked 2009 cabin bookings with a couple of rental companies and their report was very encouraging. As of the end of May 2009, fulfilled and future bookings have recovered from the 3% to 5% slump experienced in 2008 and are tracking for 2007+ levels.

While encouraging, these results are not surprising. When the economy tightens, vacation time seems to become more important to people. Due to the convenience of our location, all of the attractions and activities available and the pure natural beauty of the Smokies, this area becomes the prime vacation destination for many tourists when travel dollars have to be more carefully allocated.

Obviously, the rapid recovery of cabin rentals in the Smoky Mountains supports the desirability of investing in one.  Compared to the stock market, this rise is meteoric. Plus, a cabin investment in Pigeon Forge or Gatlinburg is an investment that can directly and significantly have a positive impact on your family’s quality of life.

As I have reported in other blogs on my website, Short Sales and Foreclosures offer significantly reduced prices but have several major down sides which, after intense investigation, break down to these:

1. Typical response time once an offer is tendered is 90 to 120 days if the property is financed by a large national mortgage lender (which the majority are). On a normal transaction the response time is 72 hours or less. It appears that this is the case because these lenders were totally unprepared for the current economic conditions and to use East Tennessee jargon, “The head of the dog doesn’t know what the tail is doing”. Frequently, an offer on a short sale has to be submitted 5 or 6 times to various departments because there are no established systems for dealing with these situations. Then the offer may have to go before 1 or more committees to be approved.
2. Even if you get an acceptance of your offer, the lender reserves the right to terminate their acceptance until the transaction has closed and the buyer has no recourse for any closing costs they have expended.
3. Since mortgages do not include furnishings (although sales of existent cabins have traditionally come fully furnished at the sales price), short sales and foreclosure sales typically include no furnishings and the buyer has to pay an additional $20,000 to $30,000 (on a 1 to 3 bedroom cabin) before the cabin can be rented.

So where’s the good news? If you look hard enough you can usually find a silver lining to any dark cloud and I’ve found one!  Developer owned short sales that are locally financed and approved are available and in this situation these short comings can be virtually eliminated! This leaves you with a more or less standard transaction only at a significantly reduced price. The same is true for cabins where the developer has allowed foreclosure and the lender has already approved the situation and has assigned an officer to handle the sale. Further, in these situations, the cabin transfers “As Is” (i.e. furnished) and thus saves the buyer the extra expense of refurnishing.

More good news… After weeks of digging I have found several PRIME 1, 2 and 3 bedroom cabins here in the Smokies that fall into this category and are superb investment options.  These cabins are luxurious one to three bedrooms and are now discounted 25% to 47% from their original prices.

Email me at will@willquinn.com for details. 

Wouldn’t we all like to do that- drive a Mercedes for the price of a Saturn? These are interesting times but along with the challanges there are opportunities and as far as owning a premium cabin in the Smoky Mountains the answer to the title question is Yes! Read on to find out how.

Legacy Mountain Resort is among the best resorts in the Smokies. Its location is in proximity to the highest drawing attractions, the cabin designs and construction quality is second to none, the amenity complex was designed and built to significantly increase the value and income of every cabin in the resort and the views are absolutely spectacular. The major drawback from an investment perspective was that at the height of the market in 2006 and 2007 they were priced so high that, even at full occupancy their potential return on investment was less that many investors were seeking.

Having had a 20+ cabin purchase belly up after the cabins had been completed, Legacy hit the down turn of the market with a large inventory of completed but unsold cabins. Consequently, three of these cabins are available as foreclosures and several are available as short sales at discounts from 25% to 47% from their original prices. Due to all the factors previously mentioned coupled with the virtually at-cost price available, these cabins represent the best opportunities I’ve seen since I started selling cabins in 1992 and will certainly be among the premier investment opportunities for the long term.

If you would love to own your own premier cabin in the Smokies but have been waiting to get the biggest bang for your buck, it will never get better than this!

If you would like detailed information on these and other opportunities, please email me at will@willquinn.com and I’ll send it to you.

P.S. Deals like these won’t last long so get the details and see how one of them will work for you.

When presenting information to a potential cabin buyer, I provide estimated income / expense statements as well as estimated averaged annual return on investment estimates. With an increased interest in investment cabin purchases due to the advent of short sales and foreclosure sales the following is the cover attachment I send with my estimates. It explains the criteria I use  for those financial figures I have to estimate.

“With the apparent bottoming of cabin sales at the end of 2008, short sales have become a factor (though a small factor) in the Smokies. Since the beginning of 2009, I have been analyzing short sales / foreclosure sales as they appear on the market.  While on paper the prices are very attractive, when these properties are analyzed for their investment potential, one thing becomes painfully clear; most of them were bad investment decisions when they were purchased and remain poor options even at their reduced prices. That having been said, I have found several choices that are extremely attractive options.

In preparing the Cash Flow and Averaged Annual Return on Investment estimates for these properties I have attempted to be conservative as far as any necessary economic assumptions. The income estimates for the next 7 years were obtained from the best management company for each property assuming that rental rates and occupancy would maintain the 2007 / 2008 levels which are relatively lower than the previous 5 years. This obviously assumes no rapid or dramatic recovery of general economy and each management company feels confident in their estimates.

With regard to the estimated average annual appreciation rates, 3% to 5% is a conservative estimate for these rates over the last 30 to 40 years in Sevier County according to appraisers I have consulted. Frequently, after a significant downturn in a real estate market, appreciation rates exceed their traditional averages for a time. While that could well be the case in these circumstances, I have not taken that possibility into account in my calculations.

For the vast majority of buyers I deal with, purchasing a cabin in the Smokies is a major economic and emotional decision. For my part, I am providing you with conservatively realistic scenarios so that should you decide to make such a purchase, at least in part based upon information provided by me, that your actual experience will be satisfactory and could reasonably exceed my estimates. “

That’s how I do business. If you are curious about owning a cabin in the Smokies for investment and personal use go back to www.willquinn.com and contact me.

There are two primary financing options available to a perspective cabin buyer. Your choice depends upon your personal goals and preferences. The first is a standard 15 to 30 year mortgage with a down payment of 10% to 20% where each payment is applied proportionally to principle and interest. The second option an 80% to 90% interest only loan which you can obtain for 5 to 7 years at a fixed rate. With either option, if you choose 90% or more financing you will have to pay P.M.I. (Personal Mortgage Insurance) which adds approximately one half percent to the loan rate.

While both options still exist, with the tightening of mortgage requirements in late 2008, interest only mortgages have become problematical. On an interest only mortgage, you will now pay approximately a 1.5% higher rate than on a standard mortgage. On a typical seven to ten year cabin investment this premium significantly reduces the advantage of interest only mortgages making them no longer cost effective. The only circumstance I can envision where an interest only mortgage might still be viable would be on a much more speculative purchase for three years or less with the idea of “playing the market” counting on taking short term advantage of market recovery. While a case can be made for this strategy, it has a much higher risk factor than my typical client is willing to take.

Over the last two years, the real estate market in the Smokies has experienced its first significant downward price adjustment since the early 1940’s. This real estate market has historically been one of stability showing moderate, consistent growth unlike so many markets whose growth curves look like a roller coaster with rapid increases followed by precipitance drops. When the national real estate market has shown general weakness, this market has maintained its viability longer than average and when a general recovery has occurred, this market is among the first to demonstrate that recovery.

 About the time I was getting established in real estate in the early 1990’s, nightly rental cabin sales were becoming a significant factor in this market. By the mid 1990’s, we were in a boom in cabin sales which lasted through 2005.  More than any other factor, over development, not national or local economic conditions, led to the recent downward price adjustment. From an investment perspective, the vast majority of this over building was developments that were designed to maximize the developer’s profits not to satisfy the desires of vacationers to the Smokies. Consequently, from 2000 to 2005, a glut of marginal quality nightly rental cabins flooded the market resulting in slower sales and, ultimately, lower overall prices. Fortunately, economic reality and significantly increased requirements by local planning commissions have stemmed this tide of ill considered development.     

All indications are that nightly rental cabin prices in the Smokies bottomed in the last quarter of 2008 and will begin a gradual recovery in 2009. In analyzing sales figures from their peak in the beginning of 2006 to the present, it appears that overall asking prices have decreased, on average 12% to 15%. Coupling this with an additional 3%

gap between asking price and sales price over pre 2007 levels, the net average price reduction is in the 15% to 18% range.

Especially for a perspective buyer whose major motivation is investment, the preceding information coupled with the facts I’ll present in my following blog, “Cabin Incomes for 2008” and extremely favorable mortgage rates indicate the environment is prime for a judicious cabin purchase.

With cabin prices in the Smokies appearing to have bottomed by the end of 2008, that factor of the equation would indicate it is a good time to buy. But what about incomes? Have incomes fallen commensurate with prices? Is this really the time to consider an investment cabin purchase?

Business owners in Sevier Co. TN are typically very closed mouthed about their companies’ incomes. However, having been long established in this area and having established good working relationships with several nightly rental companies, I have been able to get rental income estimates for cabin rental incomes in the Smokies in 2008 which I believe to be accurate and reliable.

I have obtained information concerning average cabin incomes managed by six long established rental companies in the Smoky Mountains. These companies were chosen because I could get reliable info about or from them and because they are a good representative sample of management companies in the Smokies. I’ve indentified and defined these companies as follows:

            Company “A”- This firm is an “in-house” manager handling only cabins in one of the highest quality developments in this area. Their gross incomes for 2008 are holding par with 2007 and they anticipate 0% loss from last year.

            Companies “B & C”- These two management companies handle high quality cabins throughout the area, have strong marketing programs and maintain tight control over the quality and quantity of their inventory. They estimate that when the final figures are tallied, they will show a 0% to 3% reduction from 2007.

            Company “D”- This company manages more mid-line cabins throughout the Smokies, has a strong marketing program and a good reputation. Their gross income is anticipated to be down about 10% from 2007.

            Company “E”- I would define the bulk of their inventory as tending towards decent but more bargain oriented cabins and they estimate a decrease of 18% from 2007.

            Company “F”- This firm has the largest inventory ranging from top quality to marginal quality. It is difficult to effectively market this number of cabins with as broad a range in quality and they appear to be 20+% down from 2007.

What this says to me is that in a difficult economic cycle, desirable cabins represented by a focused, quality oriented management company are performing well for their owners. This, coupled with a realistic downward price adjustment, creates a strong buy signal for an astute investor.

With the economic uncertainties, foreclosures and short sales have become a factor, though small, in the Smoky Mountain cabin market. As of the first week in 2009, there are 3,616 active residential listings in the Great Smoky Mountain Assoc. of Realtors MLS. Of these, 1,048 (29%) are second home/rental cabins. Of the cabin listings, there are 9 foreclosures (.0086%) and 25 short sales (2%).

I think everyone understands foreclosures, but short sales may be unfamiliar to some. A short sale is where a borrower is having difficulty making their mortgage payments and the lender has agreed to consider, under certain circumstances, to allow a property to be sold for less than is owed and to accept that lesser amount as payment in full for the mortgage.

 In reviewing these 34 listings, it is obvious why most of these properties are available at a reduced price. Quite frankly, in the best of times they were poor decisions and with the challenging conditions we are currently facing the only way they will sell is at a discount from their original purchase prices. Even though the discounts on these properties range form 20% to 40+%, the majority of them would have, at best, marginal investment potential. However, a few do have good investment potential for a patient buyer who is prepared to act quickly, have more direct involvement in the cabin’s preparation for rental and in some cases, has a lower aversion to risk than my average client.

Patience, preparation and increased buyer involvement are required for foreclosure or short sale purchases for the following reasons:

1.      You must be prequalified for a mortgage and include a commitment letter from an approved lender at the time you make your offer. This is an absolute requirement.

2.      Once you have made an offer, it will likely take weeks to get a decision from the lender who must approve the sale (as opposed to a few days in a standard transaction where lender approval is not required).

3.      Even if your offer is accepted, the lender may, for ANY reason, nullify the transaction, with no buyer recourse, up to the closing.

4.      Once you have closed, you will have to completely furnish the cabin. This is not just an upgrade but complete, including appliances, furniture, electronics and décor as virtually all foreclosures and short sales come unfurnished. The typical Smoky Mountain cabin is sold completely furnished. You will also have to arrange for your furnishings received and set up in the cabin, a service most management companies do not offer.

Because of all of these uncertainties, it is understandable why many agents are not thrilled to deal with these types of transactions but if you’re game I am too. I am not trying to discourage anyone from perusing one of these opportunities but I do want you to be knowledgeable and prepared if you choose to do so.

If you’re interested, email me and I’ll send you a list of what’s available as of the day of your request (as these can change daily) along with my recommended choices.