Despite Market Research,
Our Investor Loses Out

Autumn was the try-to-buy season for Jeff Jones, a first-time Seattle landlord who spent most of October shopping for a second rental property. He mulled making an offer on a fixer-upper in the city's Queen Anne area but realized the deal likely wouldn't be profitable. By the time he'd located two multifamily properties in an emerging neighborhood in West Seattle, other buyers got there first with better offers. He also heard about a single-family home in the same area and looked at it before its investor-owner listed it, but he rejected that deal due to jitters about the home's past problems with water leaks.

Mr. Jones is the first to admit he doesn't like losing out. He senses he's not on the inside track to locate the right properties. And when he is more resourceful and finds "underground" deals, such as a $399,000 home in Queen Anne that he considered, the financials often don't look good. So he's gone back to his personal computer, climbed in his Land Rover and resumed the search for his next investment. He's spending entire weekends and many nights after work reviewing properties. It's becoming a second job, and, he says, his quest is driving his girlfriend crazy.

"My friends think I'm borderline obsessive," says Mr. Jones. "I've just been driving all over the place. I'm extremely determined and persistent."

With his personal fortunes at stake, though, he knows he needs to do his homework -- but he also wants to avoid what many of his co-workers at Microsoft Corp. refer to as "analysis paralysis," or spending so much time researching a decision that nothing happens.

"I want to get a broader perspective on the rental market," Mr. Jones says. "I don't know what I don't know."

To overcome his learning curve, Mr. Jones decided to buy research on a few neighborhoods that appeal to local investors right now, mainly to get a sense of different areas' rental trends and prices relative to one another. He used data from Marcus & Millichap, a 34-year-old national brokerage with local affiliates that sell both property and market research. The firm offers general research as well as more targeted forecasts about the prospects for specific properties.

According to October research from Marcus & Millichap, the Puget Sound region's apartment-rental market has potential for investors for several reasons, including a projected 2.2% employment increase (a gain of about 29,500 jobs) by the start of 2005, slow apartment construction (only 2,100 units expected to become available by the start of 2005), and a vacancy-rate decrease to 7.6% from 7.8%. Meanwhile, the average asking price on rent was expected to climb 1% to $817 between 2004 and the start of 2005. With those dynamics, the firm reports that apartment-investment sales activity was up more than 40% in late 2004 versus late 2003.

Mr. Jones asked the firm to help him evaluate individual properties in the neighborhood. Like a stock-analysis firm that sells research to investors, Marcus & Millichap was able to help him identify properties in the "buy" category, and Mr. Jones says he became interested in making offers on two of them. Both were in West Seattle's Delridge neighborhood, where crime-reduction initiatives and economic development have begun luring urban pioneers. The area's northern border links to the West Seattle Bridge (drive time to downtown is less than 20 minutes during peak hours); at the neighborhood's southern tip is an outdoor shopping center, Westwood Village. The neighborhood has a new police station, a Home Depot set to open later this month and new walking trails. In addition, the new Seattle monorail will stop there and a historic school will reopen as a community-arts center.

The first property Mr. Jones liked was a weathered, lime-green home built in 1948. It sits on an 11,000-square-foot lot at the north end of Delridge on a hill known as "Puget Ridge" and was assessed at $217,000 in 2004. Located near a bus line and community college, it offers views of hills and a park as well as easy access to the West Seattle Bridge. But it went under contract before he could make an offer. The sale price is not yet available from the King County property-records office.

The second property, an older white house on a street where owner-occupied and rental homes sit side by side, is located near Westwood Village. Despite its shabby exterior, the home got "buy" marks from Marcus & Millichap because its low asking price and potential rent increases over the next three to five years suggested it could be a solid money-maker. That home, purchased for $155,000 in July, was relisted during the fall. But again, before Mr. Jones could present his offer, the house went into contract -- less than five days after its listing. According to King County property records, the home sold for $207,950 -- $53,000 more than the sale price in July.

Mr. Jones did manage to see another single-family home he learned of through a social contact, a property he briefly considered because it would have been a long-term investment like his first rental property in Seattle's Lakeridge neighborhood. The house, set on a sloped lot, has both a main floor and daylight basement that opens to a backyard. Owned by an investor who works for the City of Seattle, the house has minimal wear because only four parties had rented it during a 20-year period. The investor listed it in the low $200,000 range, primarily to free up cash for another project. He had restored its bathrooms, painted its wood siding and resodded the front lawn.

But the sloped property and the house's history of water leaks unnerved Mr. Jones.

"I'm a little sensitive about water issues," Mr. Jones says. He had had some costly water-related repairs at his Lakeridge property.

It went on the market and sold for $242,000.

To better prospect for properties, Mr. Jones is considering making "investor" business cards that he can send to owners of properties that interest him. While the approach is a long shot, he believes that if only 1% of his cards produce leads, it would be worth it. After all, he can buy only so many properties.

"I lost three houses before I bought Taft Street," Mr. Jones said of his struggle to buy his first investment house. "I've got 'rejection persistence' though."

-- Ms. Hodges is a free-lance writer in Seattle and writes the Investor Profile and Landlord Chronicles columns for RealEstateJournal.com.

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