If you own properties in Baltimore City, there is a 1 in 3 chance that you received a property tax assessment notice within the past 3 weeks, letting you know what the State says your house is worth and letting you know what the new tax bill is going to be. We got an 8” stack of notices. After going through the numbers, we found that our average assessments increased 2.47% from 2009. We find this REALLY interesting, since every published set of valuation data states that the market is down significantly since 2009. RBIntel shows that the average median sold price throughout 2008 (the data used to determine 2009 assessments) was $154,132. The average median sold price throughout 2011, however, was only $81,636. A HUGE decrease. So how are my assessments going up 2.47% on average? Needless to say, we’re working on a *few* appeals.

Shameless plug: You may or may not be aware that Dominion handles property tax appeals for investors on single family properties in Baltimore City. We’re doing so many for ourselves that we figured we’d open it up and do appeals for other folks as well. That lets us be cheap too – we only charge 25% of one year’s savings that we’re able to achieve. So, if we save you $1,000 per year in taxes, we charge $250 one time.

If you’re interested in having us appeal your taxes, e-mail Kate at Kate@TheDominionGroup.com . If the property is rented, we’ll need 3 years of Income & Expense statements. If it’s vacant, we’ll need interior photos or the lockbox combination to get our own.

All in all, 2011 was a much slower year than 2010 in terms of investment real estate transactions in Baltimore City. The total number of transactions was almost cut in half, and the number of investors with more than 10 new acquisitions during the year was down to 10, from 14 in 2010.

Mayor & City Council topped the charts again this year with over 225 properties, with concentrations in 21215, 21223, 21217 and 21213.

Dominion added a little more than 40 properties in the City.

Coppin State went into title on 37 properties on the 1600-1800 of Thomas and Warwick, continuing their assemblage efforts there.

St Ambrose Housing Aid Center purchased 25 properties this year, most were purchased from HUD.

Baltimore Preferred Properties took down 25 properties from Redbrick, the now defunct hedge fund that failed at its play to operate Baltimore City rental real estate. We hope that Baltimore Preferred Properties has a better go of it.

Summerfield, Ried and Atk added 21 properties to their respective portfolios, mostly east side, per usual.

East Baltimore Investments continued to pick up houses, 16 this year, in Patterson Park and Belair Edison.

M&S Joint Venture Development Corp bought 12 properties comprising pretty much the entire the 600 block of Pitcher St from Mayor & City Council for $2K a piece.

Baltimore Revival bought 11 properties all over the City.

The Reinvestment Fund (commonly known as TRF) purchased 10 properties in Oliver.

There were a couple instances of non arms-length transactions that look more like asset protection maneuvers, rather than actual transactions – so I left those out.

The usual suspects from both 2010 and 2011 are MCC, Dominion, Coppin, St Ambrose, Ried & ATK and East Baltimore Investments. Here’s a link to last year’s summary. This year there were still 36 buyers with more than 5 purchases and there are a good number of new names in the mix in this category, reflecting some new money coming into the market. The takeaway, though, is that activity was down in 2011 across the board – despite the fact that no one believes that the housing market has recovered and that there is a huge backlog of REO inventory. That being said, REO inventory levels are down to pre-foreclosure crisis levels. How can that be?

These guys are speaking our language: “Well, there’s at least one big Wall Street banker that’s betting on the United States becoming a “rentership” society: Morgan Stanley. The company released a report just a few weeks ago saying now is a great time for institutional investors to snap up distressed single-family homes and turn them into long-term rental units. The company says the properties don’t compete with the classic apartment rental property, so investors don’t have to worry about cannibalizing their multifamily rental investment portfolios to take advantage of the huge opportunities in single-family rental property ownership. What’s more, Morgan Stanley doesn’t see this shift to rentership as a temporary waypoint while the country sorts out its housing problems; it sees this as a fundamental shift in how the United States will define itself into the future.” Continue reading and watch the video here: Morgan Stanley: U.S. Becoming ‘Rentership’ Society.

Housing Market Insights: A Rentership Society, Compiled by Morgan Stanley

Cross Industry: Housing 2.0:  The New Rental Paradigm, Compiled by Morgan Stanley

Freedman, Rob. “Morgan Stanley: U.S. Becomes Rentership Society”. Speaking of Real Estate Blogs. 31 October 2011.

So this young reporter, Emily Friedman, from WAMU in DC calls our office and wants to know if she can ask us some questions relating to a story that she is doing on Baltimore City’s new approach to the vacant housing problem. I say “Sure, love to” and she shows up a few days later and sticks a microphone in my face. Better that than a video camera, I suppose. We jumped in the car and headed over to Rutland Ave. Here’s how it turned out…

For those new to real estate investing, the hardest part is often knowing where to start. We recommend starting by picking a small geographic area and learning that market. Zip codes are conveniently sized geographical areas – so we suggest starting with one or two zip codes. But which zip codes to choose? The answer to that lies in your real estate investing goals.

Dominion has founded its business on investing in distressed real estate. We’ll make the argument that there will always be an opportunity for profit for an operator who is willing to get their hands dirty, identify a distressed piece of real estate that needs work, renovate the property to bring it up to modern standards, and stabilize that property either via renting it or re-selling it to an owner occupant (“retailing”).

But how do you know which market to choose? Is this area a rental market or a retail market? As we all know, sales to homeowners require comps for appraisal purposes. Rental properties can be purchased with cash, so the rental strategy is not as reliant on comparable sales (though they sure do make refinancing a heck of a lot easier… so it’s nice to have some comparables nearby for refi purposes).

Let me show you three graphs of three different zip codes in Baltimore City with three different investment profiles. We’re going to characterize the investment profile of the zip code based on the data in these graphs. Depending on your personal investment goals, you’ll be able to decide which zip codes to completely ignore and which zip codes to focus on.

21205 – Just east of Johns Hopkins University – The average sale price is in the $15-$20K range. There is almost no difference between the sales prices of the REO market and the market at-large – which translates to “nearly every sale in this zip code is a distressed REO sale”. This is a bad zip code to retail in – from the sales graphs there is no evidence of homeowner purchase activity in this zip code. Very good for rentals, though. So good, in fact, a cash purchaser wouldn’t even need to refinance in order to get a good return on his capital invested.

21229 – West Baltimore near Baltimore County line – The average REO sales price is in the $40K range, whereas the non-REO properties are in the $125K range. If you’re an investor buying REO, fixing it up and selling it to homeowners, this spread has to cover closing costs, renovation costs, commissions, seller help and profit. A spread of about $100K represents a strong market for retail-ing. You also have to factor in the price point. $150K-$250K is the bread & butter retail range for the Baltimore beltway area. $125K is a little low, which means that the retail market doesn’t represent 100% of the sales. There are a fair number of rentals in this zip code as well. This is a mixed market of rentals and retail opportunities. You have to tread carefully in markets like this, because you have to build a product that is strong enough to make a homeowner fall in love. These are markets where you can find real bargains on the acquisitions side, though. Markets like these are strong rental markets because they are more stable areas and they still have some retail comps to help with your refinance appraisal.

21231 – Butcher’s Hill, Fells Point – This is a Baltimore City retail market. The average acquisition price point is around $100K and the average sale price is around $210K. Renting a property when you’re purchasing for $100K is not an extremely profitable option, but it’s not totally out of the question. This market has a $100K+ spread between the distressed properties and the stabilized ones, which means that it is a healthy market for buying properties, fixing them up and selling. Now, don’t just go out and pick any old property in 21231 or another zip code like it – you still have to scope and budget the appropriate rehab, and pull comps specific to that property’s size and amenities. But you know not to bother trying to look in 21231 for high-return rental properties.

I hope this was helpful. Please don’t hesitate to comment, ask questions, or begin a discussion regarding these ideas. By no means am I saying that this is all the info you need to get started, but we think that the concepts are valid and they should be able to help you start to build a mental framework of different sub-markets and the appropriate investment opportunities in each.

The banks have a mind to minimize losses and create an artificial “bottom”, below which they are not willing to sell. When your cost of capital is 0.5%, why not? We’d sit on properties too if our money didn’t cost us anything. Your TARP dollars at work… And the banks continue to print money borrowing at 0.5% from the Fed and buying Treasuries at 3%. I wouldn’t work for a living either if I could just sit back and print money.

There are HALF the REO listings today than there were 1 year ago – and no one is claiming that we’re done working through this foreclosure inventory – WE’VE GOT YEARS. We’re not going to get through this foreclosure crisis by strangling the market. The only thing tougher than being an Investor right now… being a real estate agent. The National Association of Realtors should be up in arms. So should the GBBR. Haven’t heard a peep from either.

The event will be held at the 400 Cathedral St, at the Central Library’s Wheeler Auditorium. Seating is limited and pre-registration is required. To register, call (410) 396-4111 or e-mail V2V@baltimorecity.gov

 We’ll be there. We look forward to seeing you there.

 Click Here to See the Event Flyer

Since 2003, Dominion has been aggregating and renovating properties near the intersection of Rutland and Lafayette in the Broadway East neighborhood. Over that period of time we have aggregated approximately 25 properties in a 2 block radius. More recently, Dominion has been working with Baltimore City to continue our efforts to aggregate the remaining vacant properties in this corridor. The cooperation was given a name as one of the 6 tenets of the Mayor’s Vacants to Value Program announced in November 2010.

On June 28, 2011, the Mayor held a press conference on the 1700 of Rutland to announce the City’s allocation of demolition and planning dollars to improve the streetscape and to eliminate 49 boarded properties that have hindered this location, in an effort to support Dominion’s private investment in the community. The Mayor was joined by City Council President Jack Young, Councilman Carl Stokes, Housing Commissioner Paul Graziano, Deputy Commissioner Michael Braverman and a number of other Housing officials, as well as a number of long-time residents of Rutland and Lafayette to witness the demolition of a blighted portion of the 1700 of Rutland and to commemorate this public-private cooperation.

Dominion staff was on-site to document the event, including the speeches by City officials including the Mayor, a speech by Fred Lewis of Dominion, and a hilarious video of the Mayor swinging a large piece of heavy machinery over the heads of the crowd. I love an unscripted press conference.

Back during the real estate bubble, economic fundamentals and real estate pricing were not necessarily correlated. Cap rates were driven down close to Treasury rates and rental economics were not even part of a buyer’s calculus when deciding what to bid on a property. The premise of an investor making money by operating the real estate was less important than buy it today for $X, sell it tomorrow for $X + $10K.

Now that the bubble has burst, economic fundamentals are once again the rule, as they should be. For rental properties, “What are houses around here going for?” is an irrelevant statement. The only numbers that matter are expected rents, expected expenses and appropriate reserves based on realistic assumptions of turnover, vacancy and capital improvements. The Net Operating Income is then divided by a capitalization rate based on the appropriate risk-adjusted return that the investor requires in order to make the money he/she wants to. Real Estate Finance 101.

Not everyone has had a few finance courses, though. Moreover, very few understand their markets well enough to be able to recognize that a property is going to be a rental – not sell to a homeowner. And even then, choosing the appropriate cap rate is more of an art than a science. The people who are least adept at making these judgment calls are Banks. They decide the list price from a desk out-of-state. And they’re currently charged with the task of trying to value and dispose of thousands of properties that are difficult to value. It’s a tough task. There’s no question.

We feel that it is healthy for those who are more familiar with a market to help educate those who are less familiar. The bottom line is that the Investor community is going to be on the Buyer side of transactions with the Bank as the selling side for many years to come. It only makes sense to try to bridge a gap in familiarity as quickly as possible. After all, we all have the same objective. We want to buy properties. They want to sell properties. The sooner that the Bank understands the assumptions that this market uses to value properties, the sooner the Bank can sell properties without feeling swindled. To that end, here are a few excerpts from some e-mails from Buyer’s agents to Listing agents for banks. The hope was that the Listing agent would simply forward the e-mail to their Bank contact and expedite the education process for the Bank.

Dear Listing Agent,

Just wanted to share a few thoughts about this listing, don’t know if they will help at all or if you may be already thinking what I’m thinking. After 174 DOM, I am contemplating bringing investor offers in the mid 40′s to low 50′s. The reasons why are:

- The concept of selling to an owner occupant is a dead premise here. The kitchen, bath, and overall finishes do not have the sizzle needed to attract an owner occupant. If a 2BR buyer is in the marketplace, they can get fully renovated (recessed lights, granite, etc for 115-130K at a slightly lesser or comparable locale)

- If the concept of selling to an owner occupant is a dead premise, then there is an abyss from the owner occupant number at 89.9K and the investor numbers at 45-52K, as no one will want to be in over 60K after minor repairs and closing costs, rent is only $1000-$1100/mo, and an $1100/mo rent supports no more than 60K debt with most investor buyers in this market it seems.

- Maybe the seller feels differently, but I think the pricing is making this one an exercise in futility. I could be wrong, I have been wrong before, but I’ve seen this phenomenon occur with many city properties that would seem to be in areas that would be best marketed toward owners. If you think I am wasting our time submitting these, let me know and I will probably hold back. Otherwise, I can probably generate 2-3 offers in the 45-52K price range by next week. Thanks for consideration and the feedback.

- and another –

Dear Listing Agent,

Thanks for the heads up on the price reduction. While I wish we could respond in kind with an increase in our offer price, the truth is the seller is still a price reduction away from any number that would draw the most probable purchaser, an investor bringing a cash/non-conventional deal. While the seller may be basing their expectations on “as-is” and renovated sold comps from the finer areas of *PROXIMITE NEIGHBORHOOD* from streets such as *BETTER STREETS IN THIS NEIGHBORHOOD* (streets where cash acquisitions have occurred in the 70-85K range due to investors seeking rehab and resale in the 160-175K range after 35-45K in rehab), the subject will have a differing exit strategy and cannot compare with regards to locale. This property does not play like *PROXIMITE NEIGHBORHOOD*. This area in fact seems to play more conservatively, with 135-145K being more of an ideal resale target for a top notch retail renovation, if any resale at all (which would put the subject in the 55-60K range for purchase). Furthermore, this home will not be an ideal rehab and resale because there is no parking on the premises but time conditional parking on *ONE STREET OVER*. With that being said, unless a 203K buyer comes and saves the day tomorrow, which is highly unlikely, this home should be priced for a rehab and rent investor, whom will at most carry about 70K basis after about 10K rehab, expecting a $1100-$1200/mo rent. Keep in mind also that this is a 1939 front, and most of the best available comps in this area have been from 1950′s fronts in the heart of *PROXIMITE NEIGHBORHOOD*, and are 1280+ sq ft GLA vs. the 1152 GLA of the subject (seems minor but there’s a noticeable differential). I know you have a done a ton of REO and probably have considered these points already when you got this one. However, if the seller knows what we know, then they should really consider this offer at 60K a good offer because it’s probably at the top range of what they can get from an all cash/ hard money purchase. I could probably have 3 bids on it from different investors in the 55-60K range, but I don’t know about any higher than that. Thanks for considering this info and forwarding it along if you deem appropriate.

We hope they’re listening. We’d sure like to buy more houses.

The 2011 Baltimore City tax lien sale concluded last Thursday. The City was trying to sell 10,839 liens with a face value of about $103mm of property taxes, water bills and environmental citations. This year 6,113 of those liens were sold collecting $17.25mm of revenue for Baltimore City. The remaining $85.7mm went back to the City. Most of this amount is uncollectable – the City just hasn’t written off the $73,000 water bill on the property on the 1700 of N Patterson Park yet. Someday they will – in the meantime the balance just keeps rolling over. In addition to the $17.25mm of taxes that the City got checks from investors for, the City is also holding $10.9mm in Bid Premiums posted by investors who really wanted to purchase a particular lien and win the right to foreclose.

Take a look at this spreadsheet which gives stats on the 25 biggest tax lien buyers this year – that is, the ones who spent the most money.  Our analysis is below:

Notable bidding strategies this year:

-          2011 City Properties was the big buyer this year. They have a resident agent address of Heidi S Kenny’s law firm, who is the wife of Steve Berman. Steve is famous for pleading guilty to price fixing in the tax lien sale several years in a row. Heidi is famous for having her hand slapped by a ruling from Judge Cannon several years ago. Kenny’s firm had an industry reputation for regularly charging well in excess of the $1300 cap that Judge Cannon deemed “reasonable” to homeowners looking to redeem their back taxes purchased by Kenny’s clients. Neither of these factors has prevented Heidi from being a big player in the Baltimore City tax lien sale this year…

-          Pluto is always a big player in the tax lien sale and is “formerly” Harvey Nusbaum’s shop. Harvey is famous for pleading guilty to price fixing in the same case as Steve Berman. Both Berman and Nusbaum have been banned from participating in tax lien sales. Pluto’s resident agent is Tacey Himelfarb. Tacey is Nusbaum’s daughter. You can forbid someone from participating, but apparently you can’t forbid their wives and daughters… It is also notable that Pluto bid so much bid premium that they drove their expected return down to only 4.4%. This is a solid indicator of a law firm generating legal fees from the purchase of tax liens. All of the other investors, except for 3, have return levels in the double digits. These guys are willing to buy tax liens at only 4.4%? They’re doing it for the legal fees, folks. Pluto just secured themselves 1135 files worth of legal work.

-          Woods Cove, Muni Trust and Sass Muni all won bids on higher lien amounts, having average lien amounts of $6,622 to $9,798. Bidding on higher lien amounts tends to be a strategy used by investors who are actually interested in getting the real estate after the foreclosure process is finished – the theory being that higher lien amounts tend not to redeem. Good real estate underwriting is key to this strategy being successful. We’ll see how they do in a year.

-          TEV, US Liens (with a resident agent of Bill Chase, a long time tax lien attorney), Kenneth Brown, Cowpens, FNA Maryland and TJCI Development (with a resident agent of Anthony Onwuanibe, another long time tax lien attorney) are notable for bidding almost no bid premium and bidding (and winning) a low percentage of the assessed value of the properties. This bidding strategy tends to be the “bottom feeder” strategy. Given that they won their bids with no bid premium posted, they were bidding on houses that few others bid on. Excellent real estate underwriting is key to this strategy being successful. These bidders are the most exposed to the “Catching a Falling Knife” risk we describe in our January 2011 post.

-          Notable bidders include 2011 MD Investments LLC, with a resident agent of Ryan Frost at 824 Eastern Blvd. This is also the address of Rex Frost, one of the City’s largest private real estate lenders. And Rev-PS LLC has a resident agent of Charles Runkles with an office address of 5616 Park Heights Ave. This is an often used address of Stanley Rochkind. See CityPaper for more info on Mr Rochkind.

- Perhaps the most notable bidder is the one who didn’t participate. Previously the largest purchaser of tax liens in Baltimore City, clients of DeLaurentis, Reiff & Reid did not participate in the tax lien sale this year at all. Having successfully foreclosed on many deeds in tougher parts of town, it appears that DRR’s clients were not game to double-down and try to purchase the rest of Baltimore’s toughest streets. DRR’s tax lien inventory is being marketed by Blue Star Realty, who shares an office with DRR at 3604 Eastern Ave.

It is also notable that there were not a lot of small investors behind this. Only 78 other entities won liens and 23 of the smaller purchasers only bought 1 lien. The sale is still dominated by the big guys, who are spending big money at relatively low return levels and bidding on the liens for the legal work. You’ve got to be very skilled at valuation and have a very tough stomach to compete in the tax sale these days.

I only wonder what the City is going to do with the 4,726 liens that didn’t sell. There’s another Project 5000 for you right there – and it would only take a year.