Real Estate Q&A––Time To Develop A New Strategy

This Real Estate Q&A appears in the week’s issue of The Sheet, which also has a lengthy and interesting article on resort air service. Check out their website if you don’t have a copy handy.

Q: In your blog posts you keep reiterating that no new real development will occur in Mammoth for a long time. What makes you so sure?

A: Real prospective buyers and “tire kickers” alike are always asking the question, “What new developments are going to occur, or on the near horizon?” And local Realtors® have promoted new developments as the resulting reason to “buy now”(and because you’re so smart). The new development concept is a big psychological part of the local real estate market.

Right now is a very different time here in Mammoth and the real estate development world. Virtually nothing is being developed outside of a half-dozen new single family homes. Even in the depressed 80’s and 90’s there was almost always something being built. In the worst of times Tom Dempsey had a few fourplex buildings under construction in Snowcreek Phase 5. He built Phase 4 in the mid-80’s. Smaller condo projects like Winterset and The Pointe were built in those lean times. John Hooper was building small single-family homes on speculation and building and selling apartment buildings during many of depressed years here in Mammoth. And in most of those years the existing inventory (#) of condos and homes in the local MLS was in excess of what we currently are experiencing.

But what are the prospects of new development? Dempsey’s successor at Snowcreek has to be looking back at the old playbook. The project has plenty of entitlements to move forward, but the monstrous and expensive units that made sense five years ago don’t make sense anymore. Creekhouse (Phase 7) is sitting still despite the most wonderful setting in Mammoth. At Phase 5 Dempsey cut the project into lots of mini phases so he could shift with the changing market. I was sitting in the unique position of being a real estate broker and a Planning Commissioner at the time. They were always trying to anticipate what the market would want two to five years in the future and I was seeing it in their applications. Sometimes they got it right, sometimes they didn’t. Now Snowcreek is facing the same challenge. Lately, we’ve had good interest and sales in Phase 5 in the 3-bedroom /3-bath 1-car garage townhomes. Those sales are in the $500K to $600K range depending on the views and which era the particular unit was built in. That says something about the market. Snowcreek is the most likely place for future development.

The next likely development potential was the Clearwater/Old Mammoth Place property. But the recent and very appealing improvements to the property are indicative of that future potential. Clearly, nothing major will change there for many. That is the new collective state in Mammoth for the next 10 years––redevelopment and not new development. It is all comes down to financing and the steep decline in values in the last three years. So what about all the property around the Village, including the former future sites of the Ritz Carlton and the “1”? Those properties are sitting on the books of New York City based equity firms. It might be years before anybody looks at them seriously. Condo hotel units in the Village are selling at bargain basement prices. Many are bank-owned sales at far below original selling prices. And as long as conventional financing is not available for buyers, who in the world would loan the money to a developer to build more units? Essentially the value of the land has gone to near zilch. (And I can see on my calendar that in the next year we will be hearing their property tax appeals.) Don’t expect the financing pickle to be solved anytime soon, Washington has to figure out what to do with FannieMae and FreddieMac first, and that may take longer than the war in Iraq. Meanwhile, we’ll have to rely on cash-buying vultures to keep those values stabilized.

So the real answer is that Mammoth is settling into a new era of redevelopment, not new development. Many of the 70’s built condo projects (along with The Rafters) are the poster children. Go look at the Summit or 1849. They’re just finishing up the details on these expensive rehabs but their locations (and decay) have warranted it. We better get used to it. It is a major mindset change from where we have been. Welcome to the world of de-leveraging in a mountain resort community. This last week the commercial real estate offering on the Sierra Center Mall hit all of the commercial brokers in Southern California. I immediately got calls from a variety of people. The Receiver’s broker has put together a nice package and pro-forma. This community can only hope that some nice, benevolent investor who loves Mammoth purchases the property and follows the ways of Mr. Demetriades. And our local government needs to learn to embrace and welcome somebody with that mindset (and pocketbook).

People are talking and we need to listen. I pulled this quote from McKinsey Global Institute about de-leveraging; “(there is a) shift in spending towards value-oriented goods and away from luxury goods, and this pattern may persist while households repair their balance sheets.” And from a Wall Street Journal blog; Luxury property, seeing the term “luxury” now equates to “prepare to be screwed.” Life is funny, everything seems to come full circle. Mammoth may not be a luxury resort, but it is a great value.

Much of the public thinks new development is good for real estate agents and brokers. Well, yes and no. What we’ve learned from the past boom cycle is this; all of the hype-on-steroids gets people enthused, and as one of Intrawest’s marketing gurus was famous for saying, “selling is the transfer of enthusiasm.” It worked, and the following credit bubble jacked the market to the sky. And with all of the mania came the industry carpetbaggers who have come-and-gone or crashed-and-burned. As I often mutter to myself, “Who were all those people?” We’re also left with a handful of empty promises from long-gone developers, but in the end we’re really okay. At least we have our coveted ice rink. And the pendulum has swung so that most in the industry report that they “work three times as hard for a third the money.” Poor baby.

For buyers in today’s market the last development cycle produced an interesting array of condo offerings, a broader variety to fill different needs and tastes. Many years ago I was mentored by an old broker who was a second homeowner in Mammoth. He introduced me to his philosophy that a buyer should never purchase a condo newer than four years old or older than 20 years old. His reasoning was that it took at least four years to sort through the “newness” of a project (i.e., organization, inherent problems, developer stuff, etc.) and projects over 20 years old were heading toward too many maintenance concerns. I’ve always thought it was an interesting philosophy but never completely accurate here in Mammoth. There are plenty of “oldies-but-goodies” in the market, especially with some of the major capital improvement projects that have happened (especially if you buy on the back-end of those assessments). But there are many newer projects that fit perfectly into his criteria, and they’re priced at significant discounts.

Meanwhile, the Mammoth market is handling the increased supply of newly developed properties, and the relatively low inventory numbers are the best indicator. This remains a great time to think re-develop. Time to remodel the interior of your tired condo, add-on to or remodel your tired existing home. And it’s a great time to purchase a dated property with good qualities and re-develop it. Local contractors are eager to work.

Enjoy Mammoth this summer, this is my 29th summer and I can’t recall one as green and lush. Of course, it all depends on the lens you’re looking through.

 

19 thoughts on “Real Estate Q&A––Time To Develop A New Strategy”

  1. Paul, There is a zero percent chance that someone as 'wise' (har har) as Jim Demetriades will come to rescue Mammoth again. Most units in Mammoth are still selling at P/R or 15-30. And you think Mammoth is undervalued?

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  2. The banks are more than happy to loan as much money as borrowers want to take as long as the fundamental numbers on the property make sense.

    The banks are now forced to look at the values of Mammoth properties as well as their cash flow and they are no longer allowed to make stupid loans to stupid people.

    Calling investors vultures that want positive cash flow for their investments given that they are taking real risks is childish and self-serving.

    What is the term for those real estate professionals and developers that used high pressure sales techniques and unconventional money lenders (ARMs) to sell properties that were vastly overvalued in the mid-2000s?

    The vultures are the sane people who expect true value. Condos that you say are a deal for $500K-$600K are really only "worth" $250K based on cashflow, so your good/great deals are still a rip-off.

    Fortunately for the borrowers, the banks are no longer going to fund these fundamentally bad deals (math is math – there is no opinion involved with how much something costs).

    The Westin is another boondoggle. These units are hotel rooms not condos. The lenders got wise to the scam, and put an end to it. The units are worth $150K to $350K depending on their size. But, given their load factors of occupancy and fees, they may not even be worth that much.

    Numbers are numbers. Cash in vs. cash out. Calling someone a vulture for wanting positive cash flow is reasonable. Wanting positive cash flow for taking a risk is reasonable.

    Expecting someone to buy a money losing property from you or other agents in Mammoth to help make a commission is not exactly reasonable. Lets be honest, the "investors" are really there to pay for units that are "serviced" by local businesses and provide a living for the locals in Mammoth.

    The fact that after paying taxes, and service fees to the locals, as well as funding the borrowings, there is giant negative cash flow that stares the investors in their collective faces.

    Fleecing Southern California "investors" seems to be the business of Mammoth real estate "professionals". Too bad the banks have turned off the supply of "professional" investors.

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  3. That was good above. Plus 1 for you.

    Don't forget those pesky HOA's either. They can easily add 6-10 k per year. Maybe throw in a chance of a "special assessment" too. That could happen sometime during ownership.

    And what do you get? I'm not sure, but it probably won't be profitable. At least not in the traditional sense, even at these prices.

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  4. nice read paul

    "Fleecing Southern California "investors" seems to be the business of Mammoth real estate "professionals"."

    …who knew ? i woulda' put my money on the flatlanders outfoxing the mountain men . zero sum world i guess .

    enjoy the dog days

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  5. What happened to the billionaires chasing out the millionaires that was the real estate professionals mantra not so long ago? Now the same professionals complain of three times the work for a third of the money? ( Must be the new mantra ) but both are B.S. lines to motivate a buyer. You professionals change mantras like the town political shysters changes priorities.

    Mammoth has long been a shell game that reinvents itself along with the economic cycles that are pretty predictable. When you see people waiting in line to buy real estate, things are about to tank. Hardly a new strategy, just another boom to bust phenomena.

    Now we are going to reinvent those tired old condo's by giving them face lifts and boob jobs and calling them something they're not. A poster child/ de-leveraging value instead of over valued shoddy construction with an expensive cosmetic makeover, done by mostly low wage migrant construction workers!

    I wouldn't buy anything until the ratios mentioned by the third poster pencil out. Mammoth rentals rarely ever pencil, so make an informed and not an emotional decision if purchasing. I would stay at the development at a busy time before I purchased and talk to other owners about the pro's and con's.

    Make no mistake, The "New Strategy" is an old idiom of how to separate a fool from as much of his/her money as possible and call them a vultures while doing it !

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  6. Jack, the shot was the "low wages" not the immigrants imported to work for them. Calling a new facade an expensive rehab is pretty humorous too. Locations he is spot on along with The Rafters improvements.

    A little love just for my fellow vultures and you too Jack.

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  7. >>Now we are going to reinvent those tired old condo's by giving them face lifts … done by mostly low wage migrant construction workers!<<

    I have worked on each of these projects and the work was done by well paid, skilled experienced workers.

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  8. I guess we differ on the definition of well paid Ed. Working long hours with no overtime with some admitting to be paid in cash, I stick with the statement of "mostly" low waged migrant workers. I watched one project almost daily and spoke to some of the migrants as part of my daily walk. The other project required driving so I may have taken liberties with my comment as my contact with the workers were very rare. I don't see contractors or their subs paying anymore then they have to in this economy.

    Knowing people in the maintenance trades in town, I have been told that one of the projects is plagued by internal structural leaks and plumbing problems. I doubt they're are be disclosed during the sales process.

    This is not personal, just my comments based on conversations with people in the know and my observation.

    I am happy you made a living wage, believe me it's rare in this town! I never said anything about the skill or appearance of the work.

    Both projects look terrific, but as much as I hate using this term, it's like putting " Lipstick on a Pig "

    I wouldn't live in either location because of the quality of initial construction,noise issues from paper thin poorly insulated walls and doors. I'm not a fan of internal hallways because of past experience. There is better bang for the buck if you're a vulture.

    I guess I long for the days when a mans word was more important the a dollar and that you could take those words as the gospel truth.

    Just expressing my views, no disrespect intended it's just my personality to call it as I see it. I believe in civil debate, it's more productive. I also believe in fighting fire with fire to keep the arrogant in check.

    Most important is to educate the consumer so they don't make the same mistake as many vultures before them and end the cycle of dysfunction that makes this such a transient community. Selling the same properties over and over may be good for a few, in long run it is harmful to the community at large, I.M.H.O. the values must come down in order for the average worker to be able to become established on the low wages being paid here.

    Have a nice day!

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  9. >>I guess we differ on the definition of well paid Ed. Working long hours with no overtime with some admitting to be paid in cash, I stick with the statement of "mostly" low waged migrant workers.<<

    My company works on 90%+ of all construction jobs in Inyo & Mono. My trade pays less then the others but still a trainee with no english, no drivers license and no skills starts at a multiple of minimum wage. My full time guys make $50k-$100k / year.

    >>I watched one project almost daily and spoke to some of the migrants as part of my daily walk.<<

    The construction workers that are getting the work done don't have time to converse with pedestrians on a daily basis. Professionals don't complain to strangers walking the dog. Perhaps your sampling wasn't representative?

    >> I don't see contractors or their subs paying anymore then they have to in this economy.<<

    Believe it or not construction in Mammoth takes more skill and know how. The contractors here on average pay far more in wages or they don't last long. Cost of living is high here and skilled employees can only be kept by paying high wages.

    Personally I pay about 2 x the going rate in LA or the rest of the state. Quality work costs more.

    Otherwise I agree with you that prices remain high in Mammoth. Historical ratios between earnings and values have not been re-established. Mammoth is an Island and it is an open question if the average worker here will ever be able to afford the average residence.

    I also agree that purchasing a condo as an investment is foolish.

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  10. Holly cow, put one little word in your blog like “vulture” investor and the entire zoo erupts. What’s so bad about being a vulture investor? After years of putting his views, business practices and sound real-estate investment advice in print, how is Paul part of the opportunistic, sell the dream and overnight appreciation hype swarm of realtors that flow in and out of Mammoth like spring mosquitos?

    As a developer, landlord and property investor, I am a vulture in situations that require that approach and Mammoth does today, unless you are buying for philanthropic purposes. Part of being a vulture is knowing that you may loose deals to the local real-estate hyenas doing inside deals on attractive carcasses or the now rare uninformed dream buying baboon that is willing to pay more than a property can likely cover in projected income.

    Any vultures out there with there hackles ruffled remember what long term contributor to the Mammoth Times RealEstate magazine was banned from the paper for providing prudent analysis and advice to tourist buyers vs fanning the flames of the Dream buyers and flip speculators? Oh that would be Paul. I hope he wears his banishment as a badge of honor.

    Anyone remember Paul advising that you should not buy in Mammoth or any resort property if you don’t love the place the way it is at time of purchase and if you need to depend on more than 20% of cost to hold being covered by rent? Anybody remember Paul’s rants about boom/bust resort markets, off the chart price per sq ft sales and a runaway market and sales prices that cannot possibly be justified or supported? Didn’t Paul use that magic phrase, “sub-prime, no document loan” like it was a perverted virus that made no sense and would likely cause a future pandemic among dream buying babbons?

    Mammoth and all ski resorts golden demographic for new development (Well off Bommers) is less golden today and past their swan song frenzy for buying legacy properties. There is no excess cash demographic on the horizon to replace Boomers and drive large new developments. Mammoth is back to being a sleepy little California ski town, not a resort, and it’s economy is still based on its 395 junkies.

    As usual, Paul nailed it again this month and makes a living without selling investment crack to all the vultures, baboons and hyenas.

    FWIW, mm1968

    Reply
  11. Paul's been giving good advice for a long time. Read his older columns. He wasn't drinking the kool-aid.

    I don't think of "vulture" as a pejorative. I'm a vulture myself, and proud of it. Have my eye on some distressed property.

    Don't buy and remodel. I'm a long-time resident and have gone through several remodels. Ed must not have worked on them, because the quality was low and the price was high. Had warranty work and major re-do's for over a year after one remodel. After all of this I do know which contractors and subs are reliable, and they aren't necessarily the most prominent (some of whom should be embarrassed with the work they were doing). I think the chance of someone outside of town finding a good contractor is low, even if you check references and ask around.

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  12. The Monache auction is today….anyone have an idea of what the units might go for? Is $150k too low for a studio? Seems to me the bids (both the level of activity and prices) should provide good market insights. Wilbur

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  13. Hey Wilbur,
    Thanks for reading! The Monache auction is Sept. 13 in Orange County, so another month of hype coming. I'll cover some of that ground in my upcoming Broker's Report.
    Better they don't hold it on Friday the 13th.

    Reply

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