Log Cabin Blog

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 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.