The one certainty of 2011 and the opportunity of 2012

January. It’s the time of year where we see blog posts, newspaper articles and advertisements on how to make more money, be thinner, be healthier, meet your goals, etc., in the upcoming year. Business owners and individuals alike are assessing and reassessing for the coming year. 

I hope everyone had a prosperous 2011. If you’re like many companies, 2011, if not prosperous, was at least interesting. There is one thing for certain about 2011: It was full of uncertainty. With a shaky stock market, high unemployment, budget deficits and tremendous national debt, there are an abundance of questions. There’s also the uncertainty over future government policy and how that may affect our businesses, continued uncertainty in the real estate market and questions of when we may at least see the bottom.  

There’s just a lot of uncertainty. 

As we’re in the early days of 2012, we must look at what the future holds. With the presidential election coming in November, what changes, if any, will we face? Are changes in the capital gains taxes coming? Will there be other tax increases? Should a property owner sell now to enjoy these historically low capital gains taxes, even in this soft real estate market? When will inflation again become a factor, eroding the value of our dollar and pushing investors back into real estate as a hedge against inflation? With this inflation, will we see rising interest rates, making now a good time to buy if one is using financing? 

Uncertainty can feel overwhelmingly negative, but that doesn’t have to be the case. Uncertainty breeds some of the greatest of opportunities.

At J. P. King, over our 97 years in business, we have seen many uncertain times — world wars, the great depression, recessions and much more. While all of these events caused much hardship for many, our great country recovered and moved forward. During these times, real estate continued to be a sound investment for an opportunity seeker. Real estate has, over time, been an important hedge against inflation. While not every property is a good investment, many great properties are currently undervalued and should be carefully considered. Regardless of what the future holds, J. P. King will be there for you to bring you some of the best properties in the marketplace and provide our buyers and sellers sound real estate advise and opportunity. 

Here is wishing you and your family the best for the coming year. 

Is Farmland on the Bubble?

Back in 2004, my wife and I were seriously looking into buying a condo at the beach in Alabama. We’d waited several years before making this decision, thinking that these condos couldn’t possibly continue to increase in value like they had been. At some point, prices would drop a little bit, and that would be the time to buy. But for nearly a decade, we watched as prices continued to rise. We were within a few thousand dollars once of having an offer accepted on a unit, but we walked away when neither party would give any further. My wife jokes that I was too stubborn to go any higher, but in all actuality, something just didn’t feel quite right. I just didn’t see how these increasingly high prices could possibly be justified.

Within a few short years, the market crashed, and those same condos are selling (if they sell) for almost half of what they were then. Whew…

As I think about that experience, I can’t help but wonder, after watching farmland in the U.S. increase in value for two decades, if the same isn’t bound to happen. Are farm prices on the bubble, so to speak?

Just as we were doing when we were looking at condos several years ago, money follows a pack. We had seen others’ successful investments, and we wanted in. That bubble can’t maintain that much growth, that quickly. At some point, it has to pop.

I was just having this discussion with an ag lender a few weeks ago, when I mentioned to him that I had seen farmland in Kentucky renting for $250/acre. That number astounded me. Perhaps showing my, ahem, “experience”, I told him I remembered when it rented for $30. He stated some ag lenders are requiring larger down payments because of those lenders’ concern over high land prices.

I also shared that with an auctioneer friend of mine in Illinois recently when he said, “That’s nothing.” He’s seen farm land renting for as high as $511/acre in Illinois and sales prices of $10,000-11,000 per acre.

With ag land appreciation, prices and rent like that, who wouldn’t want to own their own farm land? But the prices have risen steadily since the farm crisis back in the 1980s, and it’s even risen 25% in the last year. Since we’ve entered this recession, farmland is the only form of real estate that is still rising in price.

Back in the late 1980’s we sold thousands of farms because of the crash. With commodities prices and ethanol, are the economics different today or should we anticipate another crash in the ag market? I’d love to hear your thoughts.

UPDATE: Since this post, Reuters has written more extensive story on the same topic. You can read that here if you’re curious to read more on the topic: http://goo.gl/jZQOQ

Conservation Easements and What They Mean to Buyers

On Tuesday of this week I attended a meeting of the Alabama Realtors Land Institute [RLI] and heard a presentation by Ronald Levitt and David Wooldridge of the Sirote & Permutt, PC law firm. The presentation was on conservation easements and the benefits these present to private land owners. We’ve auctioned several properties this year with conservation easements, including the Kluge Winery in Charlottesville, Va., purchased by Donald Trump, and it left me wanting to learn more about them. They discussed what may constitute a grant and what benefits this provided for a land owner. Here are a few points that I took away from RLI:

1)      More than 800,000 acres of land are put into conservation easements or outright purchases by land trusts each year that will benefit future generations.

2)      To have a qualified conservation contribution, a taxpayer must satisfy three requirements: (1) the real property must be a “qualified real property interest”; (2) the donee must be a “qualified organization”; (3) the contribution must be “exclusively for conservation purposes”.

3)      A conservation easement is a charitable donation that places a set of restrictions on a property for wildlife, recreation, green space, scenic vistas, historical areas or structures while a land owner can continue to use and enjoy it. A land trust is the beneficiary.

4)      The donor must be a qualified donor with a high income or the ability to generate significant high income in the future but can also be a high net worth individual.

5)      The property must be a capital asset and not held as a “dealer property” and meet other qualifications.

6)      The adjusted gross income limits are limited to 50% of a tax payer’s adjusted gross income for the year subject to change after 2011.

If you are interested in more information I will be happy to direct you to some professionals that can assist you, and, as always, be sure to consult with qualified legal and account professionals regarding your personal situation.

I’m curious to hear what your experiences with conservation easements have been in the past, whether it’s a property you’ve marketed as a broker or maybe even land you were personally involved with.

What I Learned at NAA About the Economy’s Future

Whew.

What a GREAT week last week at the National Auctioneers Association Conference and Show in Orlando, Fla. We came home on Saturday, and it’s taken a few days to let the week soak in. The NAA consists of over 4,000 auctioneers from all across the US and around the world. It was a great week to meet, learn from, and fellowship with those in the auction profession.

The week started with my wife Cindy and me taking our two (adult) children, Caley and Jared, to Disney World. The true kids in all of us came out as we enjoyed the rides and fun. I then spent the next several days in seminars and meetings, where we in the NAA shared opinions on our experiences in the real estate markets around the country. We discussed how technology is revolutionizing the auction method of marketing and renewed many old acquaintances and met many new friends.

The week was a special time to see my sister and fellow shareholder of J. P. King installed as the 63rd president of the National Auctioneers Association. She’s the first Alabamaian and the first female to serve in such an important role for our industry. What an honor! I know she’ll do great things for the NAA over the course of the next year — great things that she already has in the works.

I was also surprised during the convention with personally being inducted into the NAA HAll of Fame. I am truly honored with this recognition and appreciative to my fellow auction professionals.

As I accepted the Hall of Fame award, my sister, Christie, was obviously pleased with my surprise in the background.

We heard from many great speakers this year from within and outside of the auction industry. One speaker particularly stuck out to me, though. Alan Beaulieu, an economist, taught a class on “Forecasting the Future.” His opinion is that we may see a slight uptick in the economy through the remainder of 2011 and 2012 before sliding back into a recession in 2013 and 2014. While this certainly is not good news, it does provide us with a window to make decisions related to the disposition of assets before some more difficult times in the near future. Is now the best time to sell a property? Or do you have different thoughts on the way the economy might play out in the next several years? I’d love to hear your thoughts.

Congratulations, Christie

I am very excited that my sister and fellow J. P. King principal Christie King will become president of the 4,000-member National Auctioneers Association during the annual NAA Conference and Show this week in Orlando. NAA represents auction firms in all 50 states and internationally. Tonight, Christie will accept the gavel as the 62nd president of NAA. She is the first NAA president from our home state of Alabama and first female president of NAA. Christie has served various roles in NAA since 1992 and is certainly well-qualified to assume the role as president of NAA.

From a personal standpoint, I am proud of Christie. When Christie came to J. P. King many years ago, she fulfilled most all positions at J. P. King and I watched her grow, develop and gain valuable auction experience. She became involved with the Alabama Auctioneers Association where she was elected president; she served on the Alabama State Board of Auctioneers, where became Chairman of the State Board. She quickly moved through the chairs of the NAA leading to her presidency. It’s been fun walking around the conference the past few days, seeing her surrounded by people here that support her. I know she’s going to do a great job. She is a good lady and a great leader. Christie, we are proud of you!!!

Bidding Techniques for a Real Estate Auction

When someone asks me how to bid at an auction, I am, at first, taken aback, to be honest. To someone who has been in the business for over 30
years, it seems pretty simple to me, but then I remember that more than 90 percent of our audiences have never attended a real estate auction. If you’ve never been to an auction before, you certainly don’t have experience bidding for a property worth millions of dollars. I think back to an auction for some cabins that my wife, Cindy, and I attended in the Smoky Mountains. We intended to buy a cabin, and although I’ve conducted thousands of auctions, I felt a little nervousness before the bidding started. With that said, let me share a few tips with you for bidding at an auction. 

1. Understand what the bidding requirements are. Will a cashiers check be required to receive a bid package? If so, how much should the check be for? Do not risk not being prepared and not being allowed to bid. Do your homework to find out the qualifications. 
2. Arrive to the auction early. Ensure you review all the auction information in your bid package upon registration and ask questions. 
3. Understand the auction terms and how the bidding will be conducted. If it is land, will it be bid by the acre or for the total property? Will a Buyers’ Premium be added to your final bid? If so, how much?
4. Meet the auction personnel, especially the bid assistants. They will be working with you during the auction. If you do not understand the auctioneer, ask for assistance. Remember that they do represent the seller, but they’re happy to help you understand. 
5. Listen to the pre0auction announcements for updates. Sometimes property information may be changed with little notice to the seller or the auction company. Be sure you understand any updates. 
6. When the auction begins, you will be asked to start the bidding. Don’t be afraid to start the bidding at a price you will be happy to own the property for. Other bidders will be asked to do the same with the auctioneer often starting at the highest opening bid. 
7. Determine a range you will bid. Know the low and the high that you are willing to pay for any property. 
8. When the bidding starts, BID! I often see people that regrettable did not bid because the property went higher or even lower than they expected, and they were afraid to bid. If the property is in your range, remember to bid. 
9. Sometimes people strategize to bid fast or slow, or even in large or small increments. My experience is that none of these strategies really make any difference, so bid in a way that’s most comfortable for you. 
10. Enjoy the experience. An auction is a matter of each individuals personal valuation of the property. We all place different values based on our personal uses for a property. What may be a bargain for one buyer may have been too much for another. Remember that all you are doing is paying one bid more than another interested buyer, and you are getting a true “real time” read on the market. 

I hope this helps. And by the way, Cindy and I won the bid on our mountain cabin. It was a fun experience with a piece of property we’ve enjoyed!

Have you bid at an auction before? What have your experiences been?

Where are the best deals in real estate? Condos.

I’ve been confronted a lot recently with people wondering where they can find the best deals in real estate, and I’ve decided I think it may be in buying a condo. Resorts and permanent-residence units are available around the country at steep discounts. We’ve sold over 5,000 units across the country for developers and even a few lenders, so I thought I’d share some advice.

With the current real estate downturn, many lenders have faced delinquent condominium loans, where the developers could not sustain sales at a pace to stay current on their loans. Lenders have handled these problem loans in one of three ways: They foreclose the note and bulk sell the development to an investor that carries out a new sales program; They implement a sales program themselves to sell the remaining units; Or they sell the note to a note buyers who chooses to either sell it or foreclose.

Each of these scenarios can include deep price reductions for the units that can be very attractive to a potential buyer, but buyers should also exercise caution and be sure to confirm the following:

1. Obtain updated financial information for the Home Owners Association. Find out if most of the dues are current or if there are delinquent owners. These can include a budget short fall and unpaid bills on insurance, utility bills, maintenance, etc.
2. Are there many foreclosures in the development of existing owners that may cause resale problems?
3. What are the owner occupant vs. investor ownership ratios?
4. How many unsold units are in the development?

These important questions can create financing issues for you and other buyers because underwriters want the answers to these same questions. They’ll use those questions and answers to determine if they will underwrite the loans for the unit buyers. If the owner occupant to investor ratio is too high, or if more than 50% of the units are unsold developer units, they may not underwrite these loans, leaving traditional financing unavailable. Great values are definitely available in today’s market, but, as always, I recommend doing all your homework in advance.

What about you? Do you think the best deals in real estate might be somewhere else? I’d love to hear your thoughts, too. 

A Day at the Kluge Winery and Vineyard

Last week’s auction of the Kluge Winery and Vineyard in Charlottesville, Va., was an exciting event, to say the least. Last Thursday afternoon, the property sold for just over $8 million with 23 registered bidders from six states and two countries in attendance. The winery was formerly owned by Patricia Kluge, who was once married to John Kluge, the richest man in America during their marriage. Though the winery never quite performed like Ms. Kluge had hoped, it was known for having excellent Virginia wine and even provided the wine for Chelsea Clinton’s wedding.

After hitting some hard times, this 906-acre property with 164 acres of vineyards and a complete winery and bottling line, was sold to two bidders. Donald Trump bought the majority of the winery, while a long-time J. P. King buyer, Sal Cangiano, competed heavily with Mr. Trump and ended up with the remaining property, consisting of 92 acres of conservation property, a 21-acre development site and the former wine tasting room. Mr. Trump left with the winery, vineyard and Mr. Kluge’s wine label and trademarks.

The rumor is that Mr. Trump is considering his own wine label, which, with the strong Trump brand, seems like a good idea.

I enjoyed being a part of this auction. The Kluge Winery and Vineyard is a beautiful and unique property with a great history. The auction itself just goes to show that quality properties will still attract strong qualified bidders if it is properly marketed, not to mention that it takes the guesswork out of how to price these unique and valuable properties. I’ll be keeping a close eye on how Mr. Trump plans to use his investment.

How do you think Mr. Trump should use his new property?

Today’s Economy: Recovering or Still Recessing?

I’ve spent the past several days at the Next Wave Conference, a CAI seminar at Indiana University, sponsored by the National Auctioneers Association. I completed my CAI program here in the late 1970s, and I find my time renewing old friendships and meeting new auctioneers very rewarding. I spent my Sunday evening reviewing my notes from the afternoon seminar and reflecting on how this information will apply to the real estate market — both buyers and sellers — in the next several months and years.

The seminar began with several economic professors. Dr. Bill Whitte and Dr. Tim Slaper presented information on where the economy is going. They showed how the household makeup is changing — that the recession caused a decline in the formation of households.

Here’s a few of the notes I took:

• Minorities will represent 70% of household growth.
  Normally 1.3 million to 1.4 million houses are in demand each year, but because that number hasn’t been reached since 2007, there is still excess supply.
  The housing market peaked at over 2 million houses per year in 2005.
  There is probably about two and a half years worth of supply in the real estate market.
  Second homes may take even longer to recover as families rebuild wealth.
  There were 3 million less households formed from 2006-2010 as there was in 2000-2005.
  Housing prices to income is lower today for ownership and rentals. It is now cheaper to own a home than to rent one.
  Housing prices are low compared to fundamentals, but they may still go lower.
  Because housing prices are below fundamentals, when the market turns, they can increase quickly.

So what does all of this mean to buyers in today’s market? It depends on your current situation. If you do not plan to relocate soon, with today’s low interest rates, it can still pay to buy now because rebound, when it occurs, could be very strong. Just like the stock market, it can be difficult to time the market; often, when you’re convinced it’s finally the time to buy, it is already too late and you miss some of the upside potential. In many areas, housing prices are off as much as 30%, which is a great value if you’re looking to stay in a house for the next several years. I still believe that, if you’re considering buying a property, now is the time to act.

What do you think? Has the real estate market reached its low, or are lower prices still coming?

How to survive the due diligence process

There aren’t a lot of differences between buying real estate through a traditional broker and buying real estate at auction. Both forms involve bidding and negotiating with a seller in one form or another, and both try to close within 30 days. One of the key differences to buying at auction, however, comes in what happens in those 30 days.

With a traditional real estate purchase, appraisals and inspections are conducted after a price is agreed upon, but before closing, providing the option to negotiate and compromise on any surprise costs throughout the process.

With an auction, however, all the “homework” is conducted prior to the purchase. For a seller, one of the benefits of using the auction method is that it provides him a time-specific date to sell and close on his property. With that, he sacrifices some of the price he may receive, which is passed on to the buyer. After you’ve done your research on the front end, be sure to calculate whatever faults you find into your high bid price. Since most auctions sell real estate “as is, where is”, you should always know what you’re buying and bid on a non-contingent basis. If the property needs a new roof, be sure to deduct that price from your highest bid, since there’s no negotiating with the seller afterwards.

So what should you look for when you’re doing your due diligence? First of all, if you don’t have much real estate experience and are interested in buying at auction, I would recommend hiring a broker. At a J. P. King auction, you can hire a broker at no additional charge to you if you’re the winning bidder. We pay a broker that represents a buyer. These professionals can help you obtain comparable sales information and market information, along with being able to recommend someone to hire for inspections. You may also want to check for registered sex offenders, school information, and transportation and utility providers. Property information would include a home inspection report, termite inspection, taxes and insurance cost and HOAs if applicable.

If you do discover any problems related to the property, it is important to have professional advice, including an accurate quote to correct the property issues. In an ordinary transaction, you can ask the buyer to correct those issues or take the price out of the sales price, but that rarely is the case when purchasing at an auction. When you’ve done your due diligence and know this information on the front end, you know to adjust your price accordingly. A little personal advice, remember that most repairs cost more than expected and often lead to other updating expenses, so be sure you don’t overpay for a property.

Have you ever bought a property at an auction? How did the due diligence process work for you — better or worse — versus a traditional transaction?