JF1628: Identify An Up-And-Coming Market Before Everyone Else #SituationSaturday with Brent Maxwell
Brent is back to share more great knowledge with us (see his first episode below). He is an investor in Detroit, focusing on the revitalization of the city. Brent excels at finding the areas of Detroit that are just beginning to turn around, and start buying before other investors catch on. How does he do it? Find out by hitting play. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
Brent Maxwell Real Estate Background:
- Real estate investor whose personal and professional stories align with the recovery of Detroit
- Has a passion for the “limping” sections of Detroit and helps people buy into a piece of the city’s recovery
- Listen to his previous episode:
- Bought sold & Brokered 1,000 doors of Detroit real estate with a volume of over $30,000,000 since 2005
- Based in Detroit, MI
- Say hi to him at http://www.ipsrealty.com/
- Best Ever Book: The One Thing by Gary Keller
Sponsored by Stessa – Maximize tax deductions on your rental properties. Get your free tax guide from Stessa, the essential tool for rental property owners.
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a situation for you, and here’s the situation – you want to identify and up-and-coming market before everyone else. Well, how do you do that? Today’s Best Ever guest, Brent Maxwell will be discussing that with us. Brent, how are you doing?
Brent Maxwell: I’m doing great, Joe. Good to be back.
Joe Fairless: Yeah, nice to have you back. As a refresher, Best Ever listeners, Brent is a real estate investor whose personal and professional stories align with the recovery of Detroit. He’s based in Detroit, Michigan, he’s got a passion for the “limping” sections of Detroit, and helps people buy into a piece of the city’s recovery.
I interviewed him a little while ago, episode 1357. He has bought, sold and brokered 1,000 of Detroit real estate, with a volume of over 30 million dollars. With that being said, Brent, will you give the listeners just a refresher of your background? And then we’ll go right into how to identify an up-and-coming area.
Brent Maxwell: Sure. I’ve been investing in Detroit real estate since 2005; I bought my first duplex then, and have proceeded to buy and sell a number of others for myself and for partners and for clients, and I’ve been a part of the economic crash that was in Detroit, and hit Detroit harder than most cities… But I’ve also been a part of its recovery, and I’m enjoying the ride.
Joe Fairless: The focus of our conversation today is how to identify an up-and-coming market before everyone else… So how do we do that?
Brent Maxwell: That’s a great question. For the people that have a bit of risk tolerance, I think it’s the question to be asking. When you look at, for example, Detroit as a market, as a whole, there was a trough from 2009 when we bottomed out, all the way for the next few years, and then things started to peak up. In many areas of the city and most of the suburbs property values are at, near, or even above their pre-crash peak values, but there are still many places where the values are still flat. So if you’re buying as a value investor and you’re looking for an increase and appreciation, obviously you wanna buy in an area where that curve is at least at the emerging part of the growth market, and ideally you’re getting in low, obviously… So how do we do that? I think the answer in Detroit is to look for areas where you’re starting to see signs of the percolation of transition.
Joe Fairless: And what signifies transition?
Brent Maxwell: Transition is a change of the demographics of an area. You’re looking at areas that have been stable or declining for a long period of time, and are experiencing a different character of person moving into them, whether it be middle income, middle-class people, or young, hip people, whatever that is – those are areas of transition. Of course, there’s downer transitions as well, but we’re looking for the upper transitions. Basically, we’re looking for areas that, for a lack of a better word, are approaching what many people would consider gentrifying, although really at the beginning stages of any neighborhood in transition you don’t have any gentrification, and quite frankly in the neighborhoods of Detroit there isn’t any gentrification. I realize it’s a bad word for a lot of people, but I don’t have any problem saying it because it doesn’t really exist, even in the central business districts downtown, where you’re seeing $25/ft for rental space… It’s priced appropriately, compared to similar markets nationwide, so you can’t really look at that as being something that’s displacing people.
Joe Fairless: How do you find that data? Where do you look? …and if you’re on the ground, same question.
Brent Maxwell: Well, there’s two questions there, really – how do you find the data and what does it look like from the ground? The data is readily available to anyone with basic access to comps in an area. You can see days on market, prices of properties that have been sold, photos of those properties and such by looking at the MLS or any associated feed that comes from that. So that’s one step. The other step though is actually being in the neighborhoods and in the areas that we’re talking about, and kind of getting a feel for it by being present all the time.
When you see a young couple moving in, with young kids, and a couple dogs, and they look completely out of place compared to the other people in the neighborhood, and there’s a bar that was formally run down and now it’s got some hipsters coming to hang out there, you know that there’s something going on in that particular area. These are kind of harbingers of progress, and leading indicators of an area that is on the edge of hip, or will maybe someday be hip.
Joe Fairless: From the data question and response you said you wanna look at comps in the area, and some specific data points like days on market and prices of properties that have been sold. What specifically are you looking for with days on market?
Brent Maxwell: A decrease in days on market. I like to divide the market into quarters, and I look at the top quarter for my investing purposes. A decrease in days on market on the top quarter of properties means that the people who are buying the more expensive properties in an area are acting faster… And in conjunction with the decrease in the days on market you wanna see a drive-up in prices.
Joe Fairless: So when you say you divide the market into quarters, you’re dividing it into quarters based on purchase price?
Brent Maxwell: Sale price, yeah.
Joe Fairless: Sales price, yeah. Got it. Okay, so you look at all of the sale prices for a particular area, and then you divide it into quarters, and then if you see a decrease days on market for the most expensive quarter of properties that have been sold, then that’s a good indicator.
Brent Maxwell: Yeah. And another good indicator is looking at the bottom quartile, and looking at the floor of the market. Now, Detroit is unique, I would think – at least in my experience – among markets, as far as the floor being in many cases non-existent, and there being sometimes a large number of what I would consider negative value properties. If I could expand on what I mean by that…
Joe Fairless: Yeah, please.
Brent Maxwell: If you have a neighborhood where a 3-bedroom 1,000 sq. ft. bungalow in great condition sells for $40,000 – which exists in the city of Detroit – and in that same neighborhood you’ve got a blown out bungalow that’s selling for $5,000, if it takes you $35,000 to get that $5,000 bungalow up to the place where the $40,000 bungalow that’s just as nice is, then you’ve got a property that is awash on a dollar-for-dollar basis. You’re investing 40k in either property, but in one case you’re losing out on opportunity cost, because you’re tying up your money over a longer of period of time, while you’re in that renovation/stabilization phase. You’ve also got the risk associated with the time that you’ve got a rehab in play… So that’s not a good deal.
Now, some of those properties actually end up being where — if you look at them and you take them… A lot of times they’re sold on a quitclaim deed, which means they’re sold with a suspect title, or there’s no guarantee on the title… So you’ve gotta take the time to go to an attorney and have them quiet the title, there’s back-taxes, huge back water bills, sometimes there are assessments from the city or blight tickets attached to this type of property… You can have a property that actually costs you more to get it stabilized and functional than the nicest properties in that neighborhood are selling for. So I’d consider that a negative value property. If you can buy a cherry for $40,000 and it costs you $50,000 to get the house next door that’s trashed and turn it into a cherry, the house next door doesn’t have any real value.
Joe Fairless: Yeah, that is understood.
Brent Maxwell: So Detroit has got that, it’s got negative value properties, it’s got neighborhoods where there’s no floor, where the properties go down to $1, $500, $1,000… There’s properties available still in many neighborhoods of Detroit for that low price point. Now, they don’t have any real value, so you’re not hitting a home run by buying a $1,000 property. You’re probably better off just spending your money on lottery tickets. But at the same time, when you look at the bottom quarter of neighborhoods and those thousand-dollar properties go away, and all of a sudden the floor creeps up to $10,000 or $20,000, then you’ve got a neighborhood where you can seriously look at that and say “There’s something going on here. This was formerly a highly distressed neighborhood, a war zone, what have you. Now none of these properties are being given away on a deed, for a dollar.”
Joe Fairless: And what period of time are you looking for the historicals to see how it’s trending?
Brent Maxwell: I go back to ’05.
Joe Fairless: Okay.
Brent Maxwell: From a chart standpoint it’s really pretty if you go back that far, because you get to see the top, or the peak coming in ’05-’06, and then the softening, the crush in ’08, the drops in ’09, the trough in ’10, ’11 and ’12, and then the emergence of the markets in that same period. So you can kind of do a graph over time of sales price in an area, trying to get properties — looking, for example, at that 3-bedroom 1,000 sq. ft. bungalow we were talking about. And you can overlay one area versus another area and see that while they both experienced a peak and they both experienced a crash and they both experienced a trough, one of them has pulled out of the trough and now the values are shot way up, and the other one is flat. Then you can throw a third neighborhood in that same thing and overlay it in there and you can see that it’s flat, but now the values are starting to creep up, and you’ve got a 25% increase in your curve. You start to see the beginning of what they call a hockey stick, right?
Joe Fairless: Yup.
Brent Maxwell: But you don’t wanna see a hockey stick with a long blade, you wanna see the hockey stick with a short blade, because you know you’re at the beginning of that curve.
Joe Fairless: Yup. You said “area” – how are you defining “area”?
Brent Maxwell: I use neighborhoods. I draw my own custom maps. The multiple listing service (MLS) here in Detroit breaks things down into arbitrary – they’re not [unintelligible [00:11:47].18] but they are just picked randomly – areas; so they’re not very useful. You can define areas by zip code, which is in my opinion too large and also sometimes not as useful… City – obviously, we’re talking about the 139 square miles that is the city of Detroit, so it’s far too big…
Joe Fairless: Right, of course.
Brent Maxwell: I mean, you can throw Boston, San Francisco and Manhattan in there and still have room for Phoenix.
Joe Fairless: Dang! I didn’t know that.
Brent Maxwell: Yeah, it’s huge. You can throw a lot of big cities in there and you think “Wow, all these fit in the same area…” Actually, when it comes to Phoenix, the density of Phoenix is very similar to the density of Detroit.
Joe Fairless: Hm. Just warmer weather.
Brent Maxwell: There’s certainly warmer weather, yeah. I have relatives in the Phoenix area.
Joe Fairless: Do you use just an Excel spreadsheet? When you say overlay, is that what you do?
Brent Maxwell: No. You’d be surprised by the service that’s provided for brokers, the amount of information you can get. There’s a lot of data and information available, and if you really learn how to use the tool, there’s many charts available that you can create; you just have to learn how to play with it, plug the information in. So I don’t pull them out and export them into an Excel spreadsheet; I do export a lot of information into Google Sheets, the same thing… It’s what I use, because it’s call based, but I use those more for marketing data and for generating a list, and that sort of thing.
The sheets I’m talking about for the overlays – I don’t actually overlay them, I just print them out and look at them next to each other, and you can see transvisually. So it looks like a line chart. On the left-hand side of the page you’ve got the mountain that was the great peak, and then the Great Recession crash, and then the trough, and then towards the right you’ve got ’15, ’16, ’17, ’18 as far as the years go… And you can look at it and you can see the action over time. So I compare the areas that I’m looking at versus the surrounding areas in other key metric areas that I’m very familiar with in the city. And by areas, I do mean that thing, what I said about neighborhoods. [unintelligible [00:13:35].20] block by block and street by street, and there are definitely neighborhood boundaries… Which works to our advantage in some cases, especially when it comes to, for example, comps. If you’re dealing with a transitional market and you’re starting to get outside of straight investors sales, and you’re looking at selling to retail homebuyers, or using mortgages, comps become very important from a mortgage standpoint, for appraisal purposes, and appraisers look at like properties versus like properties, so they’re looking at that 3-bedroom, 1,000 sq. ft. bungalow, and you can have a neighborhood in Detroit like East English Village, which is a historic, very nice middle-class neighborhood that borders on one side Cornerstone Village, and on the other side Morningside, and these two neighborhoods share some of the similar housing stock.
So you can have a 3-bedroom bungalow that’s $225,000 in East English Village, which the appraisers will use to comp out properties on both the neighborhood next to it, Morningside, and on the other side, Cornerstone Village. You get to ride off their comps. Obviously, with the changes in the way the laws work, not only does the seller nor the buyer have any access over the appraiser, and the lender doesn’t either; there’s like a third-party appraisal company that enables all that stuff now… But they still pick their comps from the data. So the advantage is you can work near a hot neighborhood, as long as you have similar properties – that’s technically not the same neighborhood, but appraisers don’t care about neighborhoods, they care about zip codes, cities and like properties.
Joe Fairless: Anything from a on-the-ground standpoint? You mentioned young couples with a dog, and hipsters going into a bar that’s been opened… Anything else, a type of business maybe that you’ve seen, that indicates that the property value is increasing?
Brent Maxwell: Yeah, absolutely. Big rooftop data companies like Trader Joe’s and Whole Foods. Obviously, when those come in the neighborhood, you know that the neighborhood is going to experience some continued resurgence… But they’re looking at rooftop data and they come later in the process.
On the front-end though, a lot of people think that they have people move to an area, and then the prices start to go up, but in my experience, before the hipper people come, you have the artists, the pioneers who come, who are looking at just cheap, cheap, cheap prices, and the ability to live and focus on their art or their lifestyle, and still have a neighborhood that works for them. So that’s something that people think is the driving force, but in my opinion, what really makes the difference is, like you said about the businesses, when you’ve got a hip restaurant that lands in a neighborhood, or a hip coffee shop, that kind of thing, that brings in people to drive to as a destination to the neighborhood, that is the big number one sign.
In Corktown, which is just outside of downtown on the West side of Detroit, we had Slows BBQ 10-12 years ago, and it was very trendy, hip and popular, and it led the procession of businesses and people that moved into Corktown, and thoroughly drove values through the roof there… And it really turned that neighborhood into a great, great neighborhood.
What we’re experiencing now on the East side of Detroit is something similar going on in the Jefferson-Chalmers neighborhood and in the East Village neighborhoods, where you’ve got [unintelligible [00:16:56].07] just opened recently, you’ve got Roses, which is a diner that’s very hip and trendy, to the point where — it begins in the busy times in the morning, there’s lines outside the door, in the middle of an area where we’d be like “Why on Earth is this diner packed with people lined up outside the door?”
Joe Fairless: There’s really not a good reason, but…
Brent Maxwell: There isn’t [unintelligible [00:17:18].19] I’ve been there three or four times, and only three or four times — I live right by there, it’s just not my thing… But the last time I went there was really the best time; I’ve enjoyed it the most then. But yeah, that’s what drives it, so the next thing you know is there’s people moving in who are bicycling all over, and the city is just thrown in from downtown all the way to the Grosse Point Border on the East side along Jefferson, which is the main road that runs by the water… They’ve done bike lanes running all the way from the city to Alter, which is huge here for Detroit.
We’ve got [unintelligible [00:17:52].04] where you can rent bicycles, all throughout downtown, Midtown, going into West Village, all surrounding the downtown central business district… But now we’ve got scooters, and I’ve seen the scooters — I don’t know if you guys are familiar with the scooter rentals…
Joe Fairless: Yeah, Birds…
Brent Maxwell: Birds, and Limes… They end up just straight up hood areas, where you’re like “Wow, how is there a scooter here?” But people of all socio-economic background use them. They’re convenient, and they’re not that expensive. They also provide an opportunity for locals for recharging them, I understand; that provides a source of income.
Joe Fairless: So you’ve provided some information on how you identify the up-and-coming markets, and we got into specifics, from the rent comps, days on market, how you look at the prices of the properties that have been sold, how you divide that into quarters, and look at the bottom, see how the bottom creep up to a certain price point, and then also the top, and then the underground neighborhoods too, and certain things to look for; you have to drive to that neighborhood, which brings in more people and more exposure.
I really appreciate this… How can the Best Ever listeners learn more about what you’re doing and get in touch with you?
Brent Maxwell: Just visit our website anytime, ipsrealty.com (Investment Property Systems Realty). Or they can call me or e-mail me. 313-422-13-33 is my direct line. You can’t text it, but you can call it; it rings my cell phone in my office. Or firstname.lastname@example.org. I’m pretty much always on, I don’t have an off-switch.
Joe Fairless: Well, Brent, thank you so much for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.
Brent Maxwell: Wonderful.