Log Cabin Blog

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.

Summarizing the sales environment, current cabin incomes and foreclosure and short sale opportunities at the beginning of 2009, one fact becomes obvious: owning the right cabin in the Tennessee Smoky Mountains is a strong and stable investment. While realistic price adjustments have occurred after a 15 year boom which reached an over-heated peak at the end of 2005, the cabin market is in the process of recovery in 2009 and should soon resume its traditional 3% to 5% annual value growth. Due to the leveraged nature of a cabin purchase, 3% to 5% annual appreciation provides a significantly higher return on investment than that and out performs many equity investments (stocks, bonds, etc) with a stability such investments do not offer. Plus, it provides the owner with their own Smoky Mountain retreat from the humdrum and hassles of every day life.

I mention in my literature what a mentor told me when I first entered real estate as a career: “You make your money in real estate when you buy it”. Current market conditions make this a prime time opportunity to successfully take advantage of this truism.

How long the recovery takes will be impacted by progress in the improvement of the national economy. However, with prices legitimately appearing to have bottomed, mortgage rates extremely attractive, gas prices back at reasonable levels and a strong rental market for quality cabins in the Tennessee Smoky Mountains the buy signals are apparent and strong.

Might I add that in analyzing this market after the trying times it has experienced, the information contained in my “Buyer’s Guide” is accurate and will be of value to you in consideration of a cabin purchase in the Smokies. Especially interesting is the breakdown of the sizes of cabins included in the foreclosures and short sales. On the foreclosure list (9 total) and the short sale list (25 total) the break down is:

            One Bedroom: Foreclosure-   1 (11%) Short Sale-   2 ( 8%)

            Two Bedroom: Foreclosure-   3 (33%) Short Sale- 11 (44%)

            Three Bedroom: Foreclosure- 3 (33%) Short Sale-   6 (24%)

            Four Bedroom: Foreclosure-   0 (  0%) Short Sale-   4 (16%)  

            Six Bedroom: Foreclosure-     1 (11%) Short Sale-   1 ( 4%)

            Eight Bedroom: Foreclosure-  1 (11%) Short Sale-   1 ( 4%)

For the reasons mentioned in the guide, 2 and 3 bedroom cabins are generally not the best investment choices. If you need another copy of the “Buyer’s Guide”, email me and I’ll send it.

When you are ready to pursue your dream of owning a second home/ investment cabin in the Great Smoky Mountains, contact me and I’ll help make this a successful venture. I serve at your pleasure.