Mammoth Real Estate Q&A, April 2008

This Real Estate Q&A appeared in this last weekend's issue of The Sheet under the headline "Maybe a Trip to Mexico Is a Good Idea". That was the Publisher's banner. I originally titled it Asleep At The Wheel? Both are appropriate.

Q: In a very recent column you stated that the spring buyers “have exited for the most part and there won’t be any volume of buyers looking until late summer”. I was told from somebody in the industry that business was picking up. Can you explain your perspective?

A: Since the year 2000 there are clearly two primary selling seasons for Mammoth real estate. There has always been a pre-winter push driven by the anticipation of skiing and positive rental income. The other busy and productive period has become the late winter/early spring when Southern California families are here for extended vacations. Those weeks are more spread out due to the schools being on “tracks”. During these weeks there is no rush, no “weekend warrior” mentality. Mom and dad (and grandma and grandpa) relax a bit and can spend some quality time looking at real estate.

So with the spring break period over, the ski season winding down, and thoughts of the beach and the River on people’s minds, the Mammoth real estate market historically takes a pause. And yes, there will still be some buyers poking around and Fourth of July always brings great expectations, but as I said, I wouldn’t expect any volume of buyers until late summer.

But it is an important time of year for real estate types. Our minds go from skiing and snow management to summer sports and landscape and repair. The contractors are already moving here in town and Mammoth puts on a delightful face for summer. But here’s what is important––between now and Labor Day the inventory traditionally moves up in numbers. This typical increase in inventory will once again expose the real sellers from the not-so-real sellers. For me, I’m paying attention to the possible “gems” that may come to the market––those really choice properties that are prized and few-and-far-between, or the really good buys of quality properties. And some that after 90 days or so of marketing may become good buys. Again, for market watchers it’s an important time to observe.

So the inventory is going to increase?? Let’s look at some of the current numbers. But let me first state that there are dozens of properties that have been listed in the past 12 months that have expired or been withdrawn from the market. Many of these listings won’t reappear. This is characteristic of the Mammoth “don’t-have-to-sell” market. As of this writing there are only 65 homes listed for sale––a relatively low number. Some are very attractive high-end homes and have been on the market for years. And some are really the dregs and their owners are still living in a Starwood induced delusional state. I think some just like the attention of a (pretty) Realtor®. We’ll see some newcomers to the market, some rehash, and maybe even some price reductions. I do know thing, in this market segment there are lots of folks (wannabe buyers) watching. And as I drive around the neighborhoods this spring I see some major remodels starting.

The condo inventory has been sitting right around the 300 mark for some time. Over 10% of the condo inventory is in the Westin Monache. Another 10% is condo hotel product in the Village, and another 10+/-% is in the Snowcreek Phase 6 (The Lodges) or in Intrawest or other developer’s new inventory. That leaves about 200 of the regular old resale condos in the today’s inventory. Again, this is in no way excessive from a historical perspective.

The bulk of the truly motivated sellers are those that bought in the 2004-06 timeframe, and typically bought with 100% financing (with rapidly increasing “toxic” payments). Many of these owners will simply end up in foreclosure and those properties will end up being good buys for someone else. Oh, and there are a few motivated sellers who just couldn’t resist refinancing every penny out of their properties at the height of values.

And as we head towards the second half of 2008 there are some interesting unknowns and uncertainties that may generate activity and some good buying opportunities. The first is the Presidential election. God only knows what could happen. While one candidate proposes raising the capital gains tax, a backlash of support arises for eliminating it for a window of time to stimulate the economy. Capital gains taxation is a serious underlying driver for Mammoth real estate––both in and out of the market. And yes, tinkering with either way will have ramifications.

And what about mortgage rates? Who knows? Those buyers with down payments and good credit can get loans. Appraisals have been unpredictable––some higher, and some lower than expected. Some appraisals have queered transactions. Some have made sellers renegotiate. But the mortgage rates have been bouncing around almost arbitrarily. Now is an even more important time for buyers to have a top-notch mortgage professional working for them.

Yes, a seasonal lull in buyer traffic is all part of the sales cycle here in Mammoth. The sales push for the Ritz is having nominal, if any, effect on the balance of the market (not like in the past where these sales efforts created whirlwinds of activity). Serious market watchers will be perusing their favorite search engines and watching their segment of the market. I can already see a big difference coming between some segments. It’s all about supply and demand. In the meantime it is time to finish off some spring skiing, get the bike tuned up and maybe even think about a trip to Mexico.

Broker's Report, April 16 2008

Broker’s Report April 16––In the spirit of keeping this from sounding like the Broken Record Report instead of a fresh Broker’s Report, I will digress somewhat this time around, but hopefully produce something worth your while.

For those serious market watchers who want immediate information, here it is; the Mammoth market has, for the most part, returned to a stalemate between buyers and sellers. Some significant price reductions have brought transactions. But most sellers have dropped back into passive mode. A half dozen or so are slowly heading into foreclosure. And some have their fingers crossed that a short sale is possible. The typical spring break lookers and buyers who spread out over the weeks of the So Cal school breaks appeared and were bargain shopping. They have exited for the most part and there won’t be any volume of buyers looking until late summer. Many of the shoppers in the condo arena were not only looking to low-ball offers but were also looking for income histories. (It appears that some agents have returned to “income production selling” in the condo market––enough for broken records.)

So let me digress. Over time I pile up what I think are tasty bits information from various sources that apply to what is happening in Mammoth and the real estate market. Some of this information flows to sales meetings and some to the trash can. But some stick. So here is some of what I’ve dug out of the stack.

The April 14 edition (this is a fresh one) of FORTUNE magazine on page 30 reports “The Luxury Recession”. “Purveyors of high-end goods and services––normally insulated from economic slowdowns––say they are starting to register a sharp downturn in discretionary spending.” Bookings at the Leading Hotels of the World are down 10% in 2008, high-end steakhouses are replacing prime cuts with lower grades of meat, retail golf sales are down, yacht sales are down 50%, and private Pilates classes are making way to group classes. (I just wish I had the guts for a Pilates class.) All of this may be good or bad for Mammoth and its constituents, depending if you’ve bet on the uppity future of Mammoth or the down-home inherent qualities that have always been and always will be. (The Place to Be Is Already Here?)

From the New West Network on April 1 (this was no April Fools’) titled “Credit Suisse’s Troubled Rocky Mountain Empire”. The article speaks to the failures at the Tamarack Resort in Idaho, the Promontory Club in Utah and the Yellowstone Club in Montana––all new high-end (mountain) resort developments. What all three have in common is that international banking giant Credit Suisse is their primary financier. Tamarack is in bankruptcy and they are in default of their $250 million loan and Credit Suisse is trying to foreclose. Promontory is also in bankruptcy and owes CS $275 million. The Yellowstone deal is more convoluted and a little higher in profile. But the celebrity clientele is bailing on the half finished project. The CS loan there is $300 million.

The article states “It’s impossible to know whether Credit Suisse was a foolish lender that’s about to lose its shirt, or a shrewd deal-maker that’s about to pick up some valuable properties for a song.” I wonder if Credit Suisse has a quarter-billion dollar loan on Mammoth? But my “take away”––there is an obvious limit in the demand for luxury mountain resort product. This should continue unless the dollar becomes so worthless that the rest of the world considers basement pricing for the luxury experience. And ultimately the resilience of Mammoth is its ability to consistently do numbers.

Around town I am hearing a recurring theme. Old time locals like Steve “Bearman” Searles and Town Council candidate Chris Tolley are among those that have barked at me “We want our town back.” I ask these people what that means. Their responses are thoughtful. They think about the way Mammoth was in the 80’s and 90’s. Times were tough economically but there was a much greater sense of community. (We were all in the lifeboat together.) And there was no mania. They express they aren’t opposed to growth and development. They just don’t like the circus, the transient egos and short-term thinking––the sell-out to corporate carpetbagging. It reminds me of the old saying “Be careful of what you ask for.” But what they’re asking for is happening. Mammoth’s own form of Darwinism is resurfacing. (Darn, gorging at Nevados is so much more fun than picking over the sale items at VONS.) But I digress.

Back to real estate and some of my random observations. The Westin will epitomize this past era of excess and speculation. The currently listed inventory at the Westin Monache represents 10+% of all the Mammoth condo listings. I’m aware of many second phase defaults (and buyers walking away from their 10% monies) and now it appears they are holding back at actually re-listing the properties––the MLS as of this week reflects, “contact…for further information regarding developer product inventory.” And one local attorney has pointed out to me the developer’s Civil Code responsibility to those defaulting buyers. This creates just one more quandary that will only be exacerbated by the coming months of the rental income black hole. Buyer beware, phantom inventory is greater than ostensible inventory.

Another growing complaint is the “trust” many Mammoth buyers (2005-07) put in the Starwood acquisition. That trust has dissipated to nothingness. I guess we’re lucky the chairlifts keep running. A broken down Branding process, no new lodge at Eagle, no Village parking lot, no ski back trail, no “1”, (although the new Chair 9 is very cool albeit a very questionable investment in relation to other needs), no nothing really. Oh I forgot, fancy LA food on the Mountain. The airport may be ready just in time for fuel prices to crush the airlines. And all hope is now left to some newcomer Cowboys to put on the Ritz, pump the Town coffers and keep the trickle of momentum going. The only things we can really trust in are the God given qualities of Mammoth. It really is starting to feel like the 80’s and 90’s again.

Oh there’s that broken record. Maybe we should just brand it Broken Record Mountain. Meanwhile, it is time to renew your MVP or buy an April discount Gold pass. Get a SUV hybrid with DVDs in the back for the kids. If you ever planned on building or remodeling in Mammoth, now is a great time. The contractors are waiting.

Clearly there are many waiting-in-the-wings buyers for Mammoth real estate. But there is no pressure other than life’s clock. I don’t know how to respond to so many who want to own a piece of Mammoth but to just sit back and see where all of this is going. My answer is I’ll just do my best to keep you apprised of the market. I’m watching and analyzing every day. But don’t mind if I take some time and go skiing, go hike or ride the bike or go fishing on the Pacific. All of this will sort itself out.

Meanwhile, keep an eye on the deal for the Main Lodge property. That land belongs to the public––that’s you and me––we’re the sellers. And the Feds haven’t proved to be good fiduciaries. And you know what that gets you. Skip, skip, skip…

Please join us for Town Clean Up on May 17, the sponsoring restaurants are promising to out-do the fantastic job they did last year!

Mammoth Foreclosures 2.0––The First Inning

Foreclosures are reaching record numbers in many real estate markets, some to the extent that foreclosure numbers are exceeding actual closed sales. Seeing those kinds of statistics can be shocking. Clearly, the values in those markets will be greatly impacted by the volume of foreclosed properties. That is why I have been intensively watching and reporting on that segment of the market for the past 18 months. But all appearances are that the Mammoth Lakes market will be different. Not that it will remain unscathed, but foreclosures will not be the foot-on-the gas of a downward spiral in values.

After an early year push of a half dozen well priced and attractive lender owned properties, we have hit a lull. But there are more properties in the pipeline. Part of the lull was created by a moratorium of sorts––a farce government intervention that the lenders went along with because they were so backlogged anyway. (Oh, the things that will happen in an election year.) And we’ve been lulled by other delay tactics. Short sale attempts are causing lenders to forestall Trustee’s Sales. And pseudo bankruptcy filings (and some real ones too) are causing delays. And there are some squatters and other random salvation attempts. But even at some future peak I don’t see foreclosure numbers even being a small fraction of the sales here in Mammoth.

Each one of these pre-foreclosure (Notice of Default filed) or actual foreclosed properties is a story unto itself. Some are truly unfortunate, some are like soap operas, some reek of fraud and dubious dealing, and some were simple gambling on the Mammoth craps table. Most are a result of a series of poor decisions. And it is somewhat disconcerting to see certain local agents repeatedly appear as the agent who represented the owner in their purchase.

The process from actual foreclosure to bringing the property back to the market can vary greatly depending on the lender and the property. Some lenders are directly overseeing their REOs (“real estate owned”) through their own asset management companies. Others are using clearinghouse and sub-contracted companies. Soon after the properties are foreclosed on the status of the property needs to be assessed. If vacant, the locks are changed, no trespassing signs posted, utilities switched over, etc. Properties with personal property remaining need special care. If the properties are still occupied then the occupants need to dealt with according to the new owner’s policies. Oh, and there’s a million forms to fill out.

Eventually the property will be listed on the open market (no insider deals.) And that can take anywhere from a couple of weeks to several months. The marketing and subsequent sale and escrow are handled similar to any other sale and escrow except that the buyer must be pre-approved (but that is becoming standard in the day-to-day business too.) The critical thing for a buyer is that unlike buying straight at a Trustee’s Sale, the buyer of a REO gets to complete all their inspections, including physical inspections of the property as well as matters affecting title and any Homeowner’s Association related documents. The buyer and seller also pro rate expenses like property taxes, etc. For buyers trying to understand the whole process, it is much safer to purchase a property as an REO rather than at a Trustee’s Sale. And so far in this cycle the prices are lower too. That’s because the lender prices the REO to sell––usually slightly below the market. The REO pricing has nothing to do with how much the previous owner owed on the property.

We’re getting a glimpse of some other things; the Village will have its share of foreclosed property. We already have one under management that will come to the market soon. There are others in the pipeline. There are others being offered as short sales that will likely end up being REOs. (The real interesting question is when will the first Westin REO hit the market. It will be a year at least, but with the volume of buyer defaults, the number of quickly re-listed units and price reductions below the original selling price, AND the fact that we’re heading into the rental doldrums months, it is only a matter of time.)

We’re also getting a glimpse at which lenders kept their Mammoth loans in their portfolios and which ones sold them off (and their servicing rights.) This is an interesting sidebar to the national and international banking crisis that we are experiencing….And because of Mammoth’s geographical location we are seeing some local REOs listed with agents from places like Fresno and Chino. And their pricing is off because they don’t know the market. The lenders grade each REO you handle so a couple of bad grades and you’ll flunk out…And while the REOs in Mammoth so far have been good buys, they still have to be compared to other good buys in the market––and we are finally beginning to find out who the real sellers are.

Meanwhile, hungry agents and posers are jumping on the REO bandwagon. Don’t be fooled. Only a few months ago they were still trying to hype their favorite new development and didn’t know a Trustee’s Sale from a yard sale (some still don’t.) And they’ll likely be plagiarizing content from this column for their own promotion. (I do love the time stamps on blogs.) Now if they can just keep their names out of the public notices.

More Affordable Housing in Mammoth

March Mammoth Real Estate Q&A as appeared in the March 22 issue of The Sheet

Q: A recent Los Angeles Times article that featured Mammoth talked about the increasing apartment vacancies in town this winter. Is this for real, is it a trend, and what’s it all about?

A: While I like to focus my business on resort residential properties, I always seem to get dragged into the income property and commercial property side as well. And maybe that’s okay because it keeps the other side of my brain functioning too. For more clarity on this subject, let’s sit down with Uncle Supply and Auntie Demand and see how things are faring.

The supply side has been greatly affected by Mammoth Lakes Housing, Inc., the Town’s housing authority. They have been a significant developer in Mammoth in the past few years. They have built, and continue to build, units for low- and middle-income residents. These include units for rental and for deed restricted ownership. While some (including myself) could debate that the volume has been excessive, there are a couple of wildcards. First, there really is a limited amount of land for these projects––short of tearing down other people’s homes. But more importantly, with the financial conditions of our State and Federal governments, we never know when these generous grant programs that help facilitate these projects could cease. Better to get these projects in the ground while we can.

What I anticipated, and what I believe has actually happened, is that these affordable housing projects have repositioned many quality year-round tenants. I refer to these folks as A and B+ tenants, and many have moved from privately owned rental properties into the subsidized housing. This has impacted the vacancy factor and stability in the private sector. The result is evident in the increased vacancies we saw last fall and even right now. These vacancies are mostly found in older, substandard properties.

Another increasing supply factor are what I refer to as “specu-vestor” rentals. During the heat of the market, say 2003 to 2006, many speculators bought properties without long-term intentions. The opportunity to “turn” their properties is now gone so they have become landlords to annual and semi-annual leases to alleviate their cash flow crunch. Many of these properties used to be in the transient occupancy pool, but they aren’t missed because so many new properties have been built to fill that void.

Now let’s look at demand. It’s really hard to tell if overall economics are playing a part. We’ll have to wait for some short-term historical data. Empirical data shows there is still an employee shortage in town. Ask any businessman. But one thing for sure is the mass of migrant construction workers has moved on. (Does that mean I can dispose of the “Not Mammeth” stickers?) Some of these construction workers were occupying some of the really junky properties––and paying high rents too. We’ll see if the Ritz construction goes forward and if that impacts the market.

I don’t really buy the “winter-after-drought winter” argument. It really didn’t seem to have an affect when we had five drought winters in a row. But most importantly I do think we have hit (and are bouncing off) a ceiling on rents and that might be a good thing. High rents kill businesses that rely on lower wage employees. And after all, those employees make this town run. (Gee, is there a correlation between the peak of residential rents and the increasing vacancies in our retail and commercial space?) Lower rents can in fact increase the demand a bit. I think we’re about to find some equilibrium in the market. That’s not good for overzealous landlords, but it’s good for a whole lot of other people.

All of these supply and demand dynamics expose other concerns. With lower rents, higher vacancies, and tenants “moving-up” (that’s the American way), many of the low-grade income properties will likely fall into greater disrepair. We’re endeared to “the Ghetto” and can get a chuckle over Barrio Barjur (or is that Barrio Agua Clara?), but we all know that keeping a resort town looking good is critical to it’s success. Maybe it’s time to try re-development again––and for good reason.

I also have a professional concern. During the recent boom years many true investment properties were purchased without the buyers or agents ever running the numbers through a calculator. Many agents and potential buyers would ask me what I thought “X”. I would respond, “Show me the numbers.” What I got back most times was a puzzled look. Some even discovered that property taxes were an expense. (Some agents didn’t even know what the property tax rate was.) Many investment properties were purchased for speculation and not for present cash flow. Some were bought convinced that rents were undervalued (when in fact they might have been at a peak.) All dumb. Clearly they had no grasp on Mammoth’s economy, or seasonal economies in general. All they saw was “the new Aspen.” What may hurt some of these “investors” the most is the lack of re-salability––with market rents and rental demand going down and credit tightening, they are now in for the long haul.

So yes, it is for real and there will be winners and losers (not that again) out of the whole situation. There are telling signs. Last week’s issue of The Sheet referred to former Mammoth Mountain Real Estate Guru Peter Denniston citing a Goldman Sachs report that commercial real estate is expected to shed 21-26% in value over the next two years. And he also expressed frustration for the Village merchants and bemoaned the continued lack of a parking structure there. I always try to read between the lines. Perhaps Peter and his good buddy Rusty are eying a chance to be Village vultures. I just wonder what sort of a discount would make them buyers?

Meanwhile, take a cue from them––opportunities will show. And then it will all come down to luck. Luck being defined as opportunity meeting preparedness. Then the only question is, will you be prepared?

What’s a Resort Community To Do?

This column could have been titled Desperate Developers 3.0, but rather than bash developers I would like to pose a question––and get thinking about a solution. The development quandary in Mammoth is now coming to a head. We have a yet-to-be but soon-to-be heated Town Council race that will culminate in a June vote. We have a very controversial height-sensitive project proposed along Mammoth Creek. And the Ritz-Carlton is trying to sell a massive high-density project that is highly reliant upon a workforce that doesn’t exist and isn’t likely to exist. (Maybe my doorman job will be there after all.)

All of these variances are a result of developers simply paying too much for the land. To compensate for their overpayment, they want to increase density by pushing the setback and (especially) height restrictions and propose compromised designs (including using mechanical lifts in parking garages and “valet parking only” arrangements, etc.) I have a feeling the absurdity is only just beginning. Rather than doing their homework on the front end, they want to dump lousy projects on our community and ultimately the buyers and owners. Didn’t we learn from this the last go ‘round?

There’s no doubt the market is in a lull for these new developments. The growing “for sale” inventory in Westin Monache is telling. And the success of the current sales effort for the Ritz––and if it does in fact break ground this summer––will also be telling. But economic downturns are good times for developers to get their entitlements. There’s plenty of hope (my favorite economic strategy) and most of the local public are once again scrambling for their existence and aren’t paying attention. And the government employees aren’t so busy, so they’re compelled to justify their employment by processing ridiculous development proposals. (And right now the Town Council is dying to get a multi-million dollar Developer Impact Fee to relieve their budget woes.)

So we have all sorts of projects in the pipeline. The development pro formas are ugly. Land costs, plus “soft costs”, plus building costs, plus permits, plus DIFs, plus marketing costs (damn brokers), plus buyer concessions––jeez!! “We’re totally upside down. Who sold us this property? Where were our analysts? And the cost of financing is going up? Hell, we need to put 5 more stories on this. Okay, we’ll just bully our way through. Those Mammoth locals are dumb, we’ll just bullshit ‘em like the last guys did.”

But the real problems these developers face are demand and capacity. It will be a long time, if ever, before there is another long line of buyers for this overpriced, over-hyped, substandard property. The buyer pool has been burned and many existing owners are just getting to the pain cycle because their values are dropping fast, their costs are going up, and their revenue is marginal at best. Even worse is there is already too much supply. In total, this product is not an attractive investment and the days of easy financing and wild-eyed speculation are over. Throw in the well planned (and hyped) but failed amenity package including regular air service, public parking, a vibrant commercial district, hospitality focus, and even the ski-back trail (whatever that is really worth), and… At least we got the Gondola (to nowhere?)

So while the developers are pushing for more density, the demand for what they want to build is diminishing––rapidly. (Haven’t they figured out that buyers and visitors don’t come here to be “densified”. Convenience is one thing, but they come here for the open space, the vistas, the sunlight, the fresh air.) Ultimately, what the planners and decision makers don’t have the guts to do, the market will do. Even the investment bankers (who loan the money to the developers) have figured out that the condo hotel market has problems––even in a mature market. And Mammoth is far from a mature hotel market. (The investment bankers are also figuring out that if the operator doesn’t have any real vested interest, or what they call “skin in the game” in today’s jargon, that the hospitality, service and management levels will inevitably be substandard.) Even worse is the lending criteria for these properties is tightening. Lenders clearly see these as riskier loans, so expect larger down payments and higher interest rates for buyers.

All of this makes me think that some of these developments parcels will likely fall into one of today’s more popular real estate and financial categories––“foreclosure” or “write down”. Maybe then the developers won’t need all the variances, and can build something marketable too. And maybe we can get a couple of our half-finished projects (80/50, Solstice) completed.

So what is this resort community to do? If the market will inevitably postpone these developments, should we keep up the charade? A lot of sensible planning is being tossed out the window to accommodate these developers who overpaid for their land. This is going to be an important question to ask our Town officials and candidates in the months to come.

Scrubbing The Condo Inventory

This Q&A would have been timely for the February issue of Real Estate Times. But I would have missed the deadline anyway––too much skiing and snow to shovel. I think there’s more relevant information here than in that entire issue. So…

Q: When you say that you “scrub” the condo inventory, walk us through your mental process of doing this and the reasoning behind the scrubbing.

A: Years ago I remember waiting for Friday afternoon when the new MLS books came out––new listings and new information. Seems like the Stone Age. Things have certainly changed in the last couple of decades. Today I watch the MLS on my computer screen like a stockbroker watches the stock market––spotting new listings, volume, trends, etc.––the action in general. Luckily it doesn’t move too quickly so you can get in a few ski runs. And the rest of the interested world can watch along too thanks to the proliferation of the Internet and websites. My brain mainly processes what’s selling and what’s not. A new listing or a price reduction may compel further research, some discussion with fellow agents, a serious scratch of the head, and quite possibly a trip out into the field for a closer look. (Thank God I’m not forced to stay at my desk.)

The first number that my brain is watching is total number of condos currently listed. It fluctuates up and down a bit based on listings expiring and being renewed. Recently the number has been hovering around 280 to 290. The number seasonally peaks around Labor Day and usually bottoms in mid-winter. (If this is the bottom, we may have a ton of inventory by late summer.) Over the years I recall the condo inventory as low as 30 and as high as over 400. For a good decade, from about 1988 to 1998, the number sat around 335 (and there’s been hundreds and hundreds of condos built since then).

Condo listings come and go, some sell and some languish for years. Mammoth is greatly a “don’t have to buy, don’t have to sell” market. Many owners like to “fish”. Right now there are plenty of owners fishing. There are buyers in the market, but they’re buying at 20 to 30 percent off of the peak. Most of the posing sellers don’t want to sell at those prices. And many agents are now simply refusing to take listings at the higher prices. The standing inventory of unmotivated sellers is affecting the appearance of the market––long days-on-market and other unappealing market statistics don’t help matters. Best to just get this stuff out of the inventory. The only people it helps are the owners of real estate magazines and paid-per-hour webmasters.

So then it gets down to scrubbing. The goal in my mind is to have a dozen or so “tip-of-the tongue” best buys picked out. Good properties at good or reasonable prices, or maybe some inside information. And it’s important to have few “trophy” properties in mind. No lousy HOAs or substandard locations. No multiple cookie cutter competitors with stale pricing. These cherries are constantly changing because they are good buys and they don’t typically last. And some times they become good buys just based on a serious price reduction. And this time of year these may be difficult to even look at because they are heavily rented or snowed under.

Then the real scrubbing begins. Right now there is a large inventory of the “cookie cutters”––many are units built in the last few years and many bought on speculation. Frequent readers know I’m not enthused about the Village condo hotel units––too much supply, mediocre revenue, high costs, low utility, etc. (but your wife likes it!) And for clarification, I do condone investing near the Village, just not in the Village. (If you haven’t figured out why you need to read further into this blog’s content.) The Village will go through considerable pain, but it will recover. The sooner the better, but it will take at least 3 years or more, just depending on the level of obstinance. Other inventory in this scrub out includes The Lodges (Snowcreek 6), The Westin, Solstice and a few others.

If the prices come down these might be worth buying, but most were bought at peak pricing. We can pull about 100 +/– listings out of the inventory––like a big blob just sitting there. Some of these may end up in foreclosure, but most will just sit. Like I have reiterated before, when it comes to this class of units there is only a small percentage worth owning––ones with great locations within the project, views, sun, etc. In the condo hotel product the top floor is nice. (I recently noted a sale of a 2 bedroom in the Village, great price, but I sincerely hope the new owners are hard of hearing.)

Then my scrubbing mind goes to the “Why?” part of the inventory. Newbies can sell them but I can’t. Second homeownership should have positive connotations––great experiences and memories and anticipation of future ones. While no property is perfect, one of the goals is to minimize the nightmares. Spend some time with a conscious (or self conscious) Realtor and you know that scrubs out another 60 or 70 properties. Why? Poor locations (even though some of these units might be new), funky HOAs, long histories of defects and problems––the things your home inspector won’t find, etc. (I’ll still take a 40-year old Chateau Blanc unit over a great deal of the inventory.)

And now I get down to scrubbing on good properties that just aren’t priced to the market at this point in time. There’s nothing wrong with the property. The local agents (myself included) are, in the past couple of months, really beginning to take a stance on pricing. It is just market reality. The agents and owners have been programmed by years of increased pricing and even taking the risk of “leaving money on the table”. Those days are over. I see no “magic pill” announcements or legislative stimulus package (just more great skiing). The media and the lending environment (the return to traditional lending standards) have taken their toll. The good news is that there are still buyers interested in Mammoth. And they already have the bulk of the information to make their buying decisions. And they aren’t going to pay 2005 pricing for less than spectacular properties.

The problem is the inventory is swollen with properties that simply aren’t going to sell, at or near their currently listed price. We have proven that they will sell at something substantially less. The “don’t have to sell” owners who have their properties listed are doing the market a great disservice by bloating the inventory. The local agents and these sellers appear to be wising up. On the other hand, there are sellers hoping to sell at their price but can’t because their loan amounts exceed the current value. Some agents are marketing these as potential short sales. To make these short sales work in a second home/investment environment, something is going to have to give. Owners are going to have to put money into the transaction or the lenders are going to have change some historical policy. So far, I’m still a short sale skeptic in this market. The agents working these transactions may tire with frustration, especially for a reduced commission. The short sale buyer may conclude they aren’t getting a good enough deal.

So at the end of scrubbing the inventory, there remains a small, maybe less than 50, amount of condos to pay attention to. But the scrubbing is an almost constant. Oops, look at that, this new listing is priced to sell. Better go take a look. See ya!

You Can Check-In Any Time You Like, But Can You Ever Leave?

One of the blogs I frequently visit for quality insights into the hotel and tourism industry is the Hotel Law Blog. The writer, Jim Butler, is a prominent attorney specializing in hotel matters. His blog entries provide a unique view into current hotel trends, legal, financing and business issues, etc.––really cutting edge information about the hotel business.

Recently, Mr. Butler’s posts stopped and I was disappointed that perhaps, like many bloggers, he was no longer interested in this pursuit. But low-and-behold it has become evident he was busy with a court case––representing a plaintiff against Marriott International and Ritz-Carlton. The verdict in the case favored Butler’s client including $10 million in punitive damages against Marriott and Ritz-Carlton.

But here is what stands out from his blog entry announcing his summary of the case, “We have been helping owners, developers and lenders with many hundreds of hotel management agreements over the past 20 years. We have negotiated, re-negotiated, terminated and litigated almost every aspect of them, so the only thing surprising about the latest jury verdict handed down on January 25, 2008 against Marriott International and Ritz-Carlton is that it shows a continuing arrogance and disconnect of operators who choose to ignore their contractual and fiduciary duties.”

Further in the post Butler says, “Owners should be able to trust their operators to honor the letter and spirit of their hotel management agreement––and to fulfill the fiduciary duties that the law imposes on every agent. Operators sometimes seem to confuse the POWER they are entrusted with in running hotels with the RIGHT to do anything they wish. That is a big mistake.”

And further, “The terms of that management agreement have a controlling impact on the value of the hotel for years to come. Why? The hotel management agreement is intertwined with virtually every legal and business aspect of your hotel. It is the keystone affecting the most crucial components of your hotel’s success, including financing, ownership structure, value and profitability, day-to-day operations and guest perception. It is often said that, a management agreement can easily add or subtract 25 percent of the value and often much more! And, a long-term management agreement is difficult to “fix” once it is in place.” For the whole story go to www.HotelLawBlog.com

Well, what can I say? Ever since I was a permanent resident in the Eagle Base Intrawest built properties, and having a front row seat to how things really operate, I’ve had lots of questions. Any of my longer standing readers know I have been expressing those concerns for quite some time. In fact, in April of 2006, I forwarded (at his request) 13 questions about these types of issues to MMSA CEO Rusty Gregory. Those questions centered around the conflict between Mammoth Hospitality (a subsidiary of MMSA) acting as both the “front desk” (or reservation company) and the on-site condominium manager. The delineation between expenses and responsibilities was of great concern and there was nothing spelling it out. All appearances were they were just “winging it”, and not in favor of the homeowners. There were other concerns. I never received a response to those 13 questions. As Rusty Gregory has been quoted in the local paper, “We do a crappy job at hotel management.” That inspires confidence.

Now I have new concerns. When a “brand” or “flag” like Westin or Ritz-Carlton is involved, what value are buyers placing in the name? And what if the brand decides to bail on the project after a few years? (For those who don’t have clarity on this, the “Westin”, “Ritz-Carlton”, or even “Trump” part of these type of offerings is as a licensed operator or name. They have no ownership interest in the property. Their vested interest is rather shallow.) Now with the serious problems of staffing a large, high-level hospitality facility here in Mammoth, and the very low annual and very seasonal occupancy rates, and the overall high costs of doing business here in Mammoth, and a whole bunch of other serious obstacles (especially compared to so many other marketplaces), why would or should they stay? (Simple conjecture on my part, but the subject of Butler’s trial was the Ritz-Carlton Bali, one of the most highly rated and popular hotels in the world. If Ritz-Carlton can’t respect their fiduciary responsibility there, are they really going to care that much about Mammoth?)

And if a significant chunk of the perceived real estate value is in the brand, and the concurrent bundle of marketing, services and training that comes with it, and the brand leaves, how does that impact the value to the individual investor? As Mr. Butler points out, the management agreement can easily add or subtract 25% “and often much more!” to the value. If the Westin leaves, does “The Monache” (named after a tribe of local Indians known as “fly eaters”) inspire you to make a booking or want to own?

Do any buyers of these condo hotel units ever review the management agreements with these brands or even Mammoth Hospitality?? It’s probably in the 750 pages or so of disclosures the buyer receives and signs off on (at least the original buyers). Do they understand the ramifications if the brand decides to leave? And there are probably tons of “outs” in the management agreement. And would Mr. Butler even understand it all? And does the developer care? They’ll be down the road and protected legally. (Think Intrawest.)

One of my other concerns is how this all applies to condo hotels. In Mr. Butler’s case study there was only one owner––long established, unified, and of one-mind. Condo hotel ownership structure is scattered, disinterested for the most part, and un-unified (and even worse you might have a couple of egomaniac Board members).

But if you have lots of money and don’t care, and if being able to tell people at cocktail parties that you own a “such-and-such”, well then be my guest. Oh, and of course, the Airport will solve all of these problems.

Broker's Report, Feb. 5

Broker’s Report Feb. 5––Lots of good and interesting things to talk about.

Snow. January was a snowy and windy month and it has spilled into February. Mammoth has solid snowpack on the ground and good skiing is guaranteed through spring and the winter certainly won’t be labeled drought. It is creating buzz. And the snow has brought real estate activity with it.

Real estate sales. The holiday period and post-holiday period is traditionally slow for real estate sales––but not this year. Considering the negative state of many real estate markets, and the turned-up volume by the media, this comes as a bit of a surprise. The activity isn’t earth shattering, but it is here. And it isn’t being driven by Ritz-Carlton marketing and hype. The buyers I’m seeing don’t care about that. The most impressive thing to me in the past month is the number of cash buyers in $500K to $1M range. The files show it is primarily money flowing from the stock market. These buyers aren’t buying “luxury,” they’re looking for good buys and good values in quality locations. Many are ski-oriented properties (go figure).

Foreclosures. Long time readers here know I am constantly watching the inventory, and the segments within the inventory, as a telltale of the future. I’m also watching the foreclosure pipeline. I’m watching Mammoth foreclosures carefully because my company is representing several lenders on their newly foreclosed properties. (We have found that brokers who represent foreclosures have to be on the realistic side. Brokers can’t be drinking Kool-Aid and leading cheers and represent foreclosures.) As I have said in the past months, a large volume of foreclosures will dramatically drive values down in a market. Combined with plenty of other resale inventory, and the downward spiral only accelerates. This is happening in many marketplaces. But so far there is no sign of that in Mammoth. We’ll talk about inventory in a minute.

Presently, the total number of properties foreclosed on and subsequently sold, or in escrow, or on the market, or in the pipeline (Notice of Default filed and likely to become lender owned) is about a dozen. My current research shows that this is a low for any county in California. I do see properties on the market that are distressed and may end up in foreclosure. But again, no big numbers. The foreclosed properties here in Mammoth are typical of the national market––many of these owners never had a dime into their properties. The owners haven’t “lost” money.

Short sales. Numerous agents are promoting “short sales”. It has become trendy, with agents going to guru-type seminars to become proficient, or an “expert”. But short sales are an interesting subject in a predominantly second home market. This will likely be part of future columns, or at least future Broker’s Reports. In the past lenders haven’t had much appetite for short sales in the second home/investor market. (I’ll spare the discussion of recourse and non-recourse loans for now. For good info on this subject, check out www.sandiegopredatorylending.com. Bankruptcy and real estate attorney Kenneth L. Andrews provides good information and writes in an understandable and realistic manner.)

So far we have learned a few things about Mammoth short sales. For a lender to even consider a short sale a Notice of Default has to be filed––that means the owner has to be at least a few months late on payments. The owner has to be prepared to (really) prove economic hardship. And they may have to bring some cash to the table. And the brokers are going to hammered on commissions. And the lenders are so overwhelmed that getting someone to pay attention is difficult. And in many cases there are second and third loans. A popular tactic is to file bankruptcy to forestall the process. Trustee’s Sales are being delayed pending negotiations. Agents and sellers are hopeful. I think that much like each property that is foreclosed on, each short sale will be an individual case.

The really important “take-away” from the foreclosure and short sale market in Mammoth is that the volume of foreclosures is very small at this point and the foreseeable future. Those buying lender owned properties are getting attractive deals (the sellers are motivated). And most importantly there really are buyers in the market (multiple offers in most cases) and the sales are not destroying market values.

Inventory. Many of the same inventory trends exist but with some adjustments. No excessive growth in inventory. Numbers are actually pretty stagnant. In fact, they may be low due right now due to expired and withdrawn listings and apathetic sellers (?) and typical mid-winter shuffling around. The closings in the Westin Monache continue with the second phase closings due in the next two months. The appearance of developer owned units in the local MLS is evidence some buyers have walked away from their 10% (or have otherwise walked on their transactions). Others are closing and bringing their units right back on the market. Once the second phase is completed and the inventory numbers are scrubbed, my guess is there is likely to be 50 Westin units available by late summer. But I expect the powers-that-be to manipulate the numbers. Perhaps many owners will asking, “Why did we buy this?” (Without established air service, conference business, etc., these units will sit empty all summer. But the bar is nice.)

Other Village condo hotel units are beginning to drift down to original values. A sale last week of a 2-bedroom in Grand Sierra Lodge at $560,000 is indicative. And Mammoth’s oldest standing real estate broker just reduced his 1-bedroom “investment” down to dump price. A growing sales obstacle is the increasing HOA fees that include out-of-control propane expenses and the Village association fees. Combined with very seasonal rental revenue, well…

Some of the standoff between buyers and sellers is beginning to shake loose. Plenty of inventory continues to sit. The majority of homes listed under $1M are simply atrocious and need major reductions. (They need to start thinking like the lender’s asset managers.) There is a shortage of quality homes in the $1.2M to $1.8M range. Homes in the $2M plus range are being ignored. Buyers in that range are waiting. And I think, so are the sellers. In the balance of the condo market there are some good buys showing in Snowcreek V. Snowcreek VI, The Lodges, inventory is sitting. Many of those owners bought at what now is the top of the market (2004-2006 depending on product). And the developer appears to be sitting on some unsold inventory too. But like the lender owned properties, sellers who bring their condo asking prices down 10-30% off the peak values have a good chance of selling.

The construction industry has slowed dramatically in Mammoth. From what I can tell it is an opportune time to build a home or remodel the condo. The smugness is gone. Lumber and labor costs are destined to be down. But if oil and metals stay pricey the rest of construction costs will stay high. And the Town offices have plenty of time to process your plans and permits. Spring will be a good time to shop for a lot––and there’s a couple dozen to choose from. Residential lots will simply remain a scarce market in Mammoth. But again, the take-away is that the inventory numbers are not going stratospheric. In fact, they are rather stable but very stale––and especially if you scrub through all the junk and ridiculously priced.

Commercial Real Estate. A recent Wall St. Journal headline read “Do the Math or Take a Bath”. The article could have been written about Mammoth. Plenty of commercial investment is asking, again, “Why did we buy this?” Commercial vacancies are growing and rumors abound about many tenants not able to pay rent, and it is documented that the Village has massive rent stress. So much for the hubris laden strategy by new owners to “set new thresholds for commercial rents”. (I guess you have to have been a business owner through drought and recessions to really understand.) I’ve been asking people to explain their math for years. Is all this coming home to roost?

I think I’ve babbled long enough…If the Feds raise the conforming loan level to over $700K there might be a small push to purchase and refinance in Mammoth. Stay tuned––it’s an election year! Meanwhile, serious buyers are not having a problem getting financing…. Let’s see how the Ritz sales effort turns out. I hope they build it. The Westin has had a positive effect on the community, but as one of my associates said after walking through one of the very nice 2 bedroom units, “I’d like to stay there, but I wouldn’t want to own it.” (Of course, he likes his old motorhome too.)…The Night of Lights was one of the most positive things the Mountain has done in years––thanks for bringing it back…And don’t ask me, I don’t have a clue about The Airport, The Brand, The Roof (for the ice rink), Wellness, Who really owns the Mountain at this point, or Widespread Panic coming this summer. For now it’s just real estate and some good skiing.

––30––

Mammoth Real Estate, 80's, 90's, and the 21st Century.

Mammoth Real Estate Q&A will no longer appear in the Mammoth Real Estate Times. This column would have appeared in the January issue. From now on it will only be found here www.MammothRealEstateBlog.com or on the RE/MAX of Mammoth website. I thank you for continuing to read and comment.

Q: The doomsayers (trolls?) on your blog are always referring to the crash in values in the 90’s, but as I recall the real devaluation of properties in Mammoth occurred in the 1981 to 1987 timeframe. Please draw the key differences and similarities between the 80’s to now.

A: You are correct that the early and mid 90’s was not a substantial crash here in Mammoth. Values rose slightly in the late 80’s but were still quite hungover from the disaster of the early and mid 80’s. Values in Mammoth really languished for well over a decade. It wasn’t until the Intrawest hype machine, and the better economics, of the late 90’s arrived to shake us out of the stupor. (Some argue that that long period of suppressed values––while other quality mountain resort communities inflated––is why Mammoth won’t fall as far as many other markets.) The economic conditions we experienced in Mammoth in the 90’s is why so many of us that remained (literally) in this community worked so hard to plan for a successful economic future. I have a feeling we’ll be revisiting some of those plans and failures in the next few years.

But the 80’s were a doozy for a multitude of reasons. I remember it as an era of everybody having at least four or five jobs to survive. I also remember it as a time of great skiing and lots of fun (but of course I was a lot younger.) The big wild card, and perhaps the greatest influence on real estate values, came right out of ground. The ground shook (hard) in Mammoth and Mt. St. Helens put everyone on notice of the dangers of living near magnificent geology. The USGS, like many boomers today, decided Mammoth was a perfect place to spend lots of quality time. They became known as the U.S. Guessing Society. And the press gave everyone the impression Mammoth was about to blow.

Today, the earth around us has settled down and buyers of real estate in Mammoth have witnessed natural disasters everywhere in the world (and even in their own backyard.) And they seem more concerned about escaping “city” problems––traffic, crime, etc., than they are the potential natural disasters in Mammoth. But years of USGS presence, ongoing earthquake activity, and plenty of negative media coverage, did nothing good for real estate values. It kept Mammoth at the bargain-basement values well into the late 90’s and even beyond.

Another major contributing factor was interest rates. I hear folks whine about “high” interest rates today. Anyone with a perspective will laugh. Mortgage rates in the heyday of Mammoth real estate (late 70’s/1980) were in the 14% to 16% fixed range. And real estate values in Mammoth were comparable to places like Aspen and Sun Valley. (Again, some argue that Mammoth values only “rebounded” during the goldilocks period.) Today’s interest rates are downright cheap. But those high interest rates ultimately resulted in massive foreclosure rates––foreclosure volume that dramatically affected downward market values. I remember some condo projects with a vast number of bank owned units. I don’t see that happening this time around. But…

Tax laws have always impacted real estate values in Mammoth. The tax-deferred exchange (IRS Sec. 1031) laws helped drive the market in the past 10 years. Many buyers were “exchanging” into Mammoth second homes. The tax-free sales opportunity for primary residences (Sec. 121) also drove a certain amount of volume. (Thank you, Congress and IRS.) But the tax law changes in 1986 destroyed existing and very, very attractive tax benefits to second homes owned by professionals like doctors and lawyers. Those changes alone would have affected market values, but on top of everything else it was just like finding ice on the run you enjoyed so much the day before.

And of course there was a notorious recession in the early 80’s, and some inflation too. (Will there ever NOT be inflation? Anyone want to chime in?) I’m not smart enough to know where our present day economy is going but I’m seeing a recession on Main St. But that’s bound to happen after a really good party. One other thing, timeshare was tried in the pre-80’s heyday and it failed too. This time around it was dubbed “club”. It will be fascinating to see how all that works out. Is there enough “smart” or “dumb” money to come and bail all of this out?

There are some real differences this time around. Demographics is the well beaten horse but there is no denying it is real. It seems like everyday I hear “I just turned 60 and …”. The eight-lane population highway of boomers that now want to purchase their escape-and-recreation/semi-retirement home in Mammoth were also a big part of the 80’s. They lustfully came to Mammoth to ski, buy rounds of drinks at Rafters, and seemed oblivious to earthquakes, interest rates and recession. No wonder the bar business was so good back then. Now their kids are out of college and 60 is the new 40. Make reservations and summon the sommelier.

Visitors and second homeowners have also come to appreciate summer. In the 80’s it was the big secret. The locals had it all to their poor selves. There was nobody in the backcountry. European tourists didn’t know how to tip (and there was no Euro, which today would be a welcome tip.) And trout tacos weren’t that bad, even if you had to resort to stockers caught right out of Mammoth Creek. But Town marketing efforts, mountain biking and golf have helped the crowds know how nice it is here in the summer. And that is not likely to change. In some recent years the best financial quarter for local businesses was the third quarter (July, August, Sept.)

And for true real estate watchers, one giant change from the 80’s is the transparency of information. Listings of homes and condos for sale and other real estate related data was exclusive and proprietary to the industry players. Looking back it is almost comical how the brokers controlled the information. Today it is all out in the open. Peruse all the various websites of the Mammoth brokerages and agents and a truly analytical consumer can be more knowledgeable than most of the active agents. And trust me there are plenty of Mammoth wannabe owners who are watching intently. The challenge for the modern agent is to bring added value to the process––more then just regurgitating the information they see on the computer screen. (Where the hell is Mala Ulice Street?)

In the end, the immediate drop in Mammoth real estate values should resemble the 90’s more than the 80’s. If we can just get past the hysteria and mindset of the inflated asking prices following the Starwood acquisition of MMSA and the era of toxic loans. Of course, you can always drop down a big deposit on a unit at the Ritz. Or you can go to Vegas.

Mammoth Foreclosures 1.0

Real estate foreclosure rates are accelerating to staggering numbers in many large and small marketplaces across the country. Here in Mammoth, foreclosures are moving at a different pace. Presently, there are fewer than ten lender owned properties in Mammoth. Having just completed an actual sale to a new owner and placing two other lender owned homes into escrow, I’m getting a clearer picture of how the foreclosure process is going to work––and some of it will vary lender to lender.

The Internet is playing a major role. The information is out there. And the flow of paperwork from the asset managers to the agents, and back, is all electronic. Decisions can be made quick. And the lenders and asset managers are real sellers. There’s no emotional attachment to the property, no memories, and no delusion to what the property will sell for now compared to four years ago. Each lender has a particular set guidelines and processes––and offers need to be presented in a precise format according to those guidelines. Weeding through all of this paperwork and procedure can be very time consuming. Many of the asset managers are on their own learning curve. Some are handling hundreds of files.

Each property is evaluated with a series of appraisals (by appraisers) and Broker Price Opinions (BPOs) by local real estate agents. So far the properties are being listed at attractive prices. Properties are sold “AS-IS, WHERE IS”. And the lenders don’t have the money to make significant repairs––even if the property needs it. Buyers offering 20% to 40% below the asking price (and they are) are fooling themselves. The Mammoth market isn’t there yet, and only the future will tell if it gets there. And time is of the essence––some properties are receiving immediate multiple offers. When most buyers live 300 to 400 miles away it becomes difficult to view the property. But at least the skiing is great so the trip is worth it.

As we get through more of these transactions we’ll learn more about the whole process. But how will all of this impact the larger market in Mammoth? After all, a rash of foreclosures can destroy values in a local market. My conjecture over the past couple of years has been that the number won’t be excessive. So far, that is what we’re seeing, especially in relation to other markets. Those owners that have been foreclosed on typically bought in the past three years and had multiple loans on the property. Some just gambled and lost. Because the Notice of Default-to-lender owned listing process is a 6 to 12 month process, we can see what the potential lender owned properties may be in the future. The number in the pipeline is minimal with no real growth trend noted at this time. This should be considered very positive for upholding values in the market.

What we have discovered through marketing these lender owned properties, and the balance of the market has displayed the same, is that there are plenty of buyers for and pent up demand for quality properties at a price point that lies 10% to 30% below the peak values of 2-3 years ago. That aspect of the market continues to impress me. When we received multiple offers within days on lender owned properties––that’s the proof to me. If the sellers get their prices into that buyer’s zone, then they are likely to receive offers. Other sellers are looking at this trend and are thinking they want to wait it out. The standoff continues. But will those buyers be there in the future years at these prices? We shall see. The foreclosure and lender owned properties should be a key and frontline indicator in the direction of the market. Stay tuned. I promise to keep my readers apprised of this segment of the Mammoth real estate market. Now back to all that paperwork.

Why Pre-Selling Is Bad For The Customer

It was bound to happen. It now appears I am censored. This Q&A written for the Christmas/New Year’s issue of the Mammoth Real Estate Times was rejected.

“It seems more than a column, acidic and rather negative...with a kind of nasty, whining tone.”

Personally, I think this is one of the most important columns I have written for the benefit of protecting buyer’s interests in this resort marketplace.

Q: We recently finalized the purchase of a Westin Monache unit and although we are pleased with our purchase the whole process left us with an uncomfortable feeling. From the original sales process, to the deposits, to the finalizing the sale prior to actually seeing the unit. The whole thing seems to be so one-sided, favoring the developer. Is this normal in Mammoth and what do you think?

A: The art of pre-selling condo hotel units reached its pinnacle in the past few years. The pre-selling methodology has been used here in Mammoth and in resorts all over the world. Intrawest proved to be masters of the process and many developers and brands attempted to replicate the process. In retrospect, the era created a whole new language of real estate terminology and made mini PT Barnums out of otherwise harmless real estate salespersons. The continued believers will just call me cynical, but this whole process, in my opinion, violates some real estate fundamentals.

Pre-selling evolved significantly in Mammoth at Juniper Springs Lodge in the late 90’s. Intrawest’s consulting sales firm arrived in town with the slickest of marketing materials (anybody have a copy of the video “On the Shoulders of Giants”?), finely polished and persistent sales training, great promises of forthcoming amenities and services, and techniques with catchy names like “mail drops” and “launches.” A really big show, to say the least.

The success and momentum carried into the Village and has recently culminated at the Intrawest built Westin Monache project. Over the years the cast of characters and cheerleading team changed repeatedly. (We discovered the value in not having continuum of thought.) And the attorneys went about refining the contracts to comply with California Department of Real Estate requirements while incessantly weighting the provisions toward their client, the developer. Some buyers walked away disgusted and others gleefully kept consuming the divinity. One of the primary sales strategies was to build a core group of repeat buyers with “priority” status––getting first pick at the choicest units in the next offering as well as other sycophancy. All of it perfectly delivered with superfluous but flowery “sales language.” Another strategy was that the sales team members were prolific buyers too.

Once the buyer had the “privilege” of selecting a unit (oh sorry, I always forget, they’re “suites”) at the sales event, the buyer was required to place 10 percent into the escrow. Sometime shortly thereafter, at some trigger point like the completion of framing, the buyer was required to place another 10 percent into the transaction. Then there was a 2-year or more wait for the completed product. The projects were craftily phased to rush the closing as the buildings and amenities were still under construction (just go visit the Westin for confirmation.) Many buyers closed without ever seeing the completed real estate. Of course, that was okay because many were buying on speculation because they were promised an increase in value along with great rental income (shhh…don’t tell anybody.) In fact, at the beginning of the game many units were double-escrowed by the time they were completed.

Ultimately, many of the buyers became disenchanted with their purchase because it didn’t live up to the promise. Granted, there were many obstacles in delivering the vision. We can all imagine a wider profit margin for the developer was the primary one. But early-on nobody really cared because the units had appreciated in value. (You could have bought the worst properties in Mammoth during that era and made the same profit margin, if not more.) And the sales team members and “customer satisfaction representatives” of the developer were so polished at handling the objections. The bulk of the commissions had already flowed to the sales team to live on so they were especially incentive-ized to see the successful closings.

But as the escalation of values has slowed and even moved backwards, the cracks in the walls are becoming more evident (no pun intended.) And is it surprising that the Intrawest tents are nearly folded and all but vanished from town? Resale values in the last Village project are back down to their original pricing, if not heading lower. Based on the calls and emails I’ve received, many Westin buyers are/were looking for “outs” in their purchase contracts. Unfortunately, they’ve already handed over 20%. And just ask anybody who has a profit, commission interest, or employment in these deals and “Paul is crazy!” And yes, I am. Thanks for noticing.

So why do I have such a problem with pre-selling? After all, it worked great for so many (while the market was going up.) Well, here is why. The basis of a normal real estate transaction in California is the DUE DILIGENCE allowed the buyer. It is absolutely fundamental. A buyer needs to have the right to perform inspections of the property including an inspection of the physical plant and site, the finances of any associations, the matters effecting title, etc. Not only is it their right, it is their obligation. And the completion of the sale is contingent upon that due diligence and what is discovered. Now maybe buying something off Ebay is okay, but when buyers are plunking down a lot of money AND taking on substantial liabilities (like large, growing common area fees) they deserve to touch it, feel it, examine it, and let their advisors do so too if they choose. When a transaction has “seller reserves the right to change, modify…blah, blah, blah” plastered all over it, and you have to wait 2 to 3 years for the finished product, it spells RUN! to me. Many things can change in 2 to 3 years.

For example, I attended a recent new owner’s walk-through at the Westin (I didn’t sell them the unit.) They had already closed escrow. I think they were a little shocked at how small the unit was, and that the furniture barely fit, and that the refrigerator was hardly big enough for a six-pack, and that there was no garbage disposal in the kitchen sink, and on and on. And they couldn’t even stay in the unit because “the building isn’t finished.” (They did get an incentive/credit for closing early.) I got the distinct impression that if they didn’t already own the unit that they would not be all that excited about ponying up the money to buy it. They probably would have turned around and walked right out––like I’ve seen many potential buyers do at a property they don’t like. And it wasn’t about feng-shui.

Beyond what the physical plant has to offer, these buyers were marketed a professionally managed rental program (“front desk”) and common area management––including a financially sound and well-budgeted association. Promises, promises. (Meeting and maintaining the “Westin standards” is probably their best ally.) These projects are heavily dependent on propane gas––boilers, gas fireplaces, protecting plumbing from freezing, heat traced walkways, etc. How do pre-sold buyers get to know where these expenses will escalate to? Are the proposed budgets grossly underestimated? The past decade and personal experience has shown it costs a lot more to operate and maintain the common area than originally projected by the developer and their consultants. Imagine that.

In the daily real estate practice in California the buyer’s deposit is protected by the DUE DILIGENCE allowed for in the agreement. And most often that deposit is a small fraction of the purchase price––usually 3 percent or less. As I said before, in these pre-selling arrangements the buyer has 20 percent already tied up. The developer’s contracts differ, but for non-performance by the buyer the first 10 percent is likely to be lost and the second 10 percent will be tied up in some sort of legal quagmire. Some privilege. Some recent buyers have seriously considered walking away from the 10 percent but are concerned about what will happen to the second 10 percent. Outside of some mythical, guaranteed escalating real estate market, this is no way to be a buyer, in my opinion.

In this next era of real estate, I think waiting to experience the finished product, waiting to see how the property is managed––from hospitality, to services, to finances, will be the way of prudent buyers. And by-the-way, the speculation days are over. Now you’ll be able to book the unit and be a guest long before you’re an owner. That will be refreshing.

Happy New Year!

The VRBO Phenomenon, and Where It May Take Us.

VRBO’s presence and success is growing dramatically. What is VRBO? VRBO is www.vrbo.com or vacation rentals by owner online. The website is a relatively no frills but highly effective portal for over 90,000 vacation homes available for rent worldwide. In the past 15 years many websites were incubated to link resort property owners and their potential renters. One very successful one started right here in Mammoth. But VRBO appears to heading towards becoming the granddaddy. Many owners and renters utilize more than one site, but VRBO is rising to be the primary choice.

In Mammoth, owners of condos and homes go about offering their properties for rent. The owners pay VRBO a fee to advertise their properties including a photo gallery, extensive description of the features and benefits, rental rates, availability calendars, etc. Potential renters get to view and compare properties and emails and phone calls are often exchanged. Negotiations can occur based on conditions (not likely for prime times.) The potential renters get scrutinized by the property owners (one of the favorite aspects for many owners.) And there is no management cut like with a major reservation company (35% to 55% in most cases.)

It’s not for everybody. But it is becoming increasingly and incredibly popular for owners and renters. Owners typically collect the rents as well as security deposits and a cleaning fee prior to the stay. Many newcomers to the program emulate the style and systems of existing, successful owners (each market, like Mammoth, has different issues.) And a whole new level of industry is evolving and growing in Mammoth to serve the needs of owners and renters. Beyond the basic absentee homeowner services and snow removal, a specialty menu of “concierge” services is available to suit the needs of owners and renters––from daily housekeeping to mints on the pillows to pet services.

Part of the popularity of VRBO is driven by simple economics. Owners of vacation homes are looking for more net cash flow and are willing to be part of the process to earn it. Even negotiating rates during the “off season” periods can produce solid revenue––sometimes renting for weeks or months at a time. The renter is taking advantage of the process and benefiting economically too. The system even allows owners of properties to trade times in their resort properties. And email is a superior enabler in the process.

All of this stirs up the old debate of nightly (transient) rentals in single-family homes here in Mammoth. When the Town incorporated in 1984, the ordinance prohibiting nightly rentals in the single-family neighborhoods was rapidly put in place. This is very unlike many (most) mountain resort communities where freestanding homes are prized rentals and large bed tax generators. (The Town of Mammoth runs on bed tax.) The Town knows all of this is going on and is certainly in a quandary. Policing and enforcing this activity is an enormous task. On the other hand, what municipality doesn’t want tax revenue––especially the kind they don’t have to share with anyone else? And some of the local bureaucrats still remember all the Town staff layoffs and downsizing of the 1990’s.

So can the community continue to miss this economic opportunity? One of the problems is that second homeowners don’t get to vote in local elections. And some owners feel they have “legal” ways around the ordinance. Recently, someone forwarded me a copy of a letter from a law firm in Jacksonville, Florida that was sent to the City Attorney for Sedona, Arizona. Apparently, this law firm has successfully overturned a similar ordinance in the City of Key West and are joining in the fight of a similarly proposed ordinance in Sedona. They claim that they have been successful in proving that these types of ordinances are “constitutionally defective.” They assert that such an ordinance violates the property rights laid out in the Constitution.

The convergence of demand for greater cash flow in Mammoth properties, the desire for increased Town bed tax revenues, and the growing popularity (and usage) of the Internet and websites like VRBO, is likely to bring this debate to a head. There is no doubt the renting consumer loves renting single-family homes. Or maybe the Town will just leave the second-home owning and renting attorneys alone and we’ll just continue to muddle through. Stay tuned. I think this is on the verge of coming to the forefront. And slower economic times tend to drive these sorts of things out of the closet.

Broker's Report, December 3, 2007

Broker’s Report Dec.3––At this point in time Mammoth’s real estate market can only be diagnosed as having some sort of split personality/schizophrenic disorder. But October and November did witness a slight uptick (from almost nothing) in activity and sales, and that wouldn’t be including the closings at the Westin. What is the evidence of all this disorder?

First, the big news-and-noise makers are the Westin Monache project (including a ribbon cutting this last week) and right next door the Staubach/Cypress Equities group announcing a deal signed with Ritz-Carlton. Normally trumpets would blare and the local real estate community would be busy putting transactions on the board. But from what I’m observing, many of the Westin buyers are grudgingly closing (some early closers were offered incentives/credits), some units that close immediately come back on the market in the Mammoth MLS at a price just enough to cover costs, and the developer (Intrawest) is placing units back on the market that appeared to be previously sold. And some of the under-contract buyers are no longer able to qualify for and finalize their loans. The undercurrent is beginning to resemble a riptide.

Meanwhile, Roger Staubach and Cypress Equities appear to be full throttle on developing the Ritz-Carlton Residences on the nearly seven acres right next door to the Westin. They plan to be open in two years. Sounds great to me. The only problem I see is they are forecasting entry-level prices at $2 million. The comparable units at the Westin are sucking wind at $500,000. And comparable units in the Village will sink below $400,000 if it doesn’t snow soon. And this trend isn’t just Mammoth. Check out the Trump-labeled projects in places like Chicago and Baja. Or condo hotel projects in Florida. Am I really missing the pent up demand for an “ultra-luxury and lavish spa” condo hotel project in Mammoth??

The high-end home market has the same split personality. High quality homes are under construction all over Mammoth. Only a couple are being built on speculation. I count ten new high-end homes under construction just in the Bluffs. And check out the monster homes under construction in Juniper Ridge and Grawhawk. These are some seriously expensive homes. And yet there is an inventory of high-end homes for sale––some of them brand new––that have sat on the market for years. (Who is servicing that debt??) My company is marketing a high-end “government surrendered” home in Grayhawk. The attention it is receiving from potential buyers is significant. It’s basically a real nice $4 million dollar fixer-upper. Personally, I like the home right down the street at just a little more, and it is brand new and has much better finish work. But it doesn’t have a bowling alley and an indoor lap pool.

The buyers and sellers continue in a bipolar state. There really are buyers out there, but few have a sense of urgency. Most want to throw out low-ball offers to see who moves and who doesn’t. Some are going to contract with steep discounts. And some are just waiting for quality properties/locations and are willing to pay a little more. (Buying on price in Mammoth doesn’t make sense over buying quality and location––no matter how low the price is, especially in the condo market. That only worked when the game was on tilt.) But the sellers, for the most part, have no sense of urgency either. “Oh let the listing expire, we’ll try next year.” or “We’ll just keep it and give it to the kids.” The other out is foreclosure, and we only have a handful so far.

Developers are sitting on substantial amounts of new-but-unsold inventory all over town. From Snowcreek Lodges to Stonegate to Gateway Village to Tallus to 80/50. So the mindset is to build more. The “Berner parcel” just closed escrow in the Village. This is a smaller parcel on the corner of Forest Trail and the newly aligned Berner Street (the realignment created the new parcel where the “1” was going to be built.) According to the agents involved, the buyer did “considerable due diligence” and is anxious to move forward. (I hope they did the Environmental studies––that used to be part of the old County and Town mechanical yard––back in the days when they use to dispose of stuff like oil and brake fluid right into the ground.) Of course, the village at Whistler was built on the old garbage dump. Maybe we’re on to something.

And now we have local brokers who have little experience, and who have never been through a market cycle, calling the bottom of the market (March 2008?) And east coast and now Texas money poised to make Mammoth an “ultra-luxury” resort. And more long-delayed improvements like the airport and ski-back trail stuck in legally contentious and seemingly nebulous/endless environmental review. (If the Creator had to produce an EIR for the earth would the evolution of man been acceptable to environmentalists?) And based on casual financial information from the past few years––is the Ski Area more profitable in a drought year? (ahhh…the law of diminishing returns.) And more and more folks really questioning the destiny of Mammoth as a resort (ahhh….schizophrenia.) If only it would snow.

But just the other day my confusion cleared while talking to an old friend who was once the editor of the Mammoth Times and also served as a Mono County Supervisor. He departed Mammoth over ten years ago and today he works for the Governator and travels all over the state. He reminded me again why Mammoth is so special. While all the beautiful (and not so beautiful) places in California are overrun with roads and people and strip malls, Mammoth remains a wide open and relatively pristine place, one destined to remain that way because of the very “environment” energies we butt heads with. Throw in all the scenic beauty, the endless recreational opportunities, and the temperate climate, and what else matters? “These east coasters and Texans really do know something,” he said.

And there are some very good things coming to fruition. The late snow has allowed the Lake Mary Road construction improvements to continue and once this is all completed it will be a major change for the better. The sidewalk improvements (including much needed storm drains) to upper Canyon Blvd. look great too. Next year when it runs from Canyon Lodge all the way down to the Village, this will stand as a major upgrade to the “Slopes” neighborhood. It certainly can’t hurt the property values. Similar improvements are slated for Meridian Blvd. in the near future. The new library is just about completed and the new ice rink facility behind it is coming along nicely. Improvements at the airport are slated for this summer, but lets not jinx it.

The site improvements at Snowcreek Phase 8, known as CreekHouse, are impressive too. Now that the initial roads and structures are up, the site that we always believed would be one of the finest in Mammoth is proving to be just that. I think acquiring a unit overlooking the Mammoth Creek drainage will be about as good as it gets in Mammoth––unless you really need to ski to your front door. And with the Snowcreek Athletic Club now heading in a new, very positive direction under new ownership and partnered with the Double Eagle Resort and Spa in June Lake, the CreekHouse location looks even better. Now just get the back nine constructed.

The real estate inventory is stable––but plenty of expired listings and most of the condo inventory was either built or bought in the last three years. Now if it would just snow. Or turn back to summer.

Mammoth Vulture Culture.

From the Thanksgiving issue of the Mammoth Real Estate Times. Happy Thanksgiving!

Q: On your blog someone started discussing a “vulture” fund to use in Mammoth. Funny, because that is what some friends and I have been talking about. Obviously, other people are thinking it is a good idea or at least something to consider. What do you think?

A: Look up, and yes the vultures are beginning to circle over Mammoth. They appear to be very high in the sky. Some are flying alone and others are gathering together. Some are hungrier than others and some are impatient. And most are in front of their laptops. And some read (and believe) the silly stuff real estate agents write.

More than a year ago I was approached for the first time in this decade to form a “vulture fund” to invest in properties here in Mammoth. The market had just begun to soften and some folks were already thinking along these lines. Good idea, proper vision, and maybe premature. So I’ve had some time to think about the prospects.

First, let’s define what a vulture fund is or might be. Without a history lesson or getting overly complicated, a fund may be a group of vultures pooling their resources to acquire distressed properties. The “resources” could be anything from access to cash, borrowing capacity (credit), opportunity insight, creative deal making skills, good risk assessment, or even the ability to move quickly. The “acquire” part would be to get an ownership interest––outright ownership, an option to purchase including a lease option, getting control of title by taking on liabilities, etc. (The “fun” has just changed structure.) When there are highly stressed situations, anything can happen. And don’t forget that the sharks are circling too. But the really big question is: How (di)stressed will Mammoth real estate become?

All of this relies on some assumptions. Vulture thinkers must believe that Mammoth real estate values are going to drop dramatically, and conversely will be going go back up significantly. Essentially they are short-term bears and long-term bulls. Those are two interesting assumptions. What will drive the market down so far and how long will it take? And what will bring the market back so significantly and how long will that take? (Those dynamics are discussed almost ad nauseam in my forums so we’ll leave that to past and future writings.)

Like most investments, timing the lowest lows and the highest highs is left only to luck. But it is capitalizing on the general trend or trends that is important––and finding quality opportunities. Right now many just wannabe Mammoth property owners have a vulture mentality. But I’m sure there are plenty of individuals who are thinking beyond their own personal desires and thinking about it from an investment opportunity viewpoint. And from what I can tell there are people also looking to pool their resources to take advantage of this perceived future trend in the market.

From a pure investment position, the vultures better gain some focus on what the predominant strategy is going to be––or what segment of the market is going to be targeted. Vultures better have goals. Like I often say, Mammoth is full of nooks and crannies (and peaks and valleys.) For instance, I don’t think I would want a portfolio mixed with residential income properties, condo/hotel units, and some single-family homes thrown in too. Perhaps a fund (and goals) for each segment makes more sense to me. Each segment will perform differently in timing, and generating maximum cash flow (to cover expenses or pay interest to cash investors) during the holding period will be different.

My frequent readers know that the single-family home segment of the market is my favorite. Scarcity in this market segment and continued demand makes it, quite possibly, the least opportunistic segment. Maybe. But for the individual vulture looking for a permanent Mammoth property, a 10-30% decrease in value on a quality property could be an excellent opportunity. On the other hand, even though the values might not drop to what appears to be “vulture” status, the potential upswing could be greater than any other segment.

There might even become opportunities for “flipping vultures.” Many Mammoth real estate buyers like to buy turnkey properties. The opportunity may appear to purchase a property in dated or really bad shape for a great price. Just bringing these properties back to a good and marketable condition could generate a handsome profit. But I haven’t seen anything like that yet.

For a true vulture fund––a pooled group of investors with a clear focus––the condo hotel inventory might provide an opportunity. Values in certain projects are dropping. Meanwhile, owners are successfully skirting the on-site “front desk” rental agencies (and their large fees) and renting through by-owner Internet based websites. A pooling of resources could include an at-home mom who could field calls from potential nightly renters, just like many owners are currently doing. Again if values drop, and good cash flow can be generated, and the value trend can reverse, then the vultures may win. Or maybe this scenario plays out in the older condominium market.

There are many potential scenarios based on where this market goes. It may or may not end up being vulture territory. Or there may be vulture territory in one segment and not the other. In the meantime, set out your goals, get your LLC’s formed, watch the market (preferably between ski days), and patiently wait for opportunity. And guaranteed you’ll be competing against other vultures. Meanwhile, I’ll stay entertained by the crows outside my office window peering over the dumpsters. They make very good teachers.