Gathering dust, gaining value

Buyers are collecting houses like art amid fight for record-low inventory

Friday, March 25, 2022, Vol. 46, No. 12
By Joe Morris

Nashville’s white-hot residential real estate market is the gift that keeps on giving to armchair analysts: How high can prices go? Is this a bubble, such as the mortgage-driven one that collapsed in 2008-09? Is now the time to cash out? Who’s buying, and what will they pay?

All good questions, and by all indicators Davidson and surrounding counties are indeed the place to be if you’re looking to sell anything from a single-family house to a multiacre tract of undeveloped land crying out to become a cul de sac.

However, there’s an interesting twist: Houses are selling within days of listing, with multiple bidders making cash offers significantly over appraised value in some cases – and then are sitting empty for weeks, months and even years after the sale. Maybe a little renovation, some yard maintenance or nothing at all.

If everyone’s rushing to move here, what gives?

It really comes down to who bought the property and their plans for it, says Steve Jolly, a broker with Benchmark Realty and current president of Greater Nashville Realtors.

“It’s really the perfect storm right now,” Jolly continues. “There’s the rise in prices, there’s supply-chain issues for repairs and renovations and there are investors who are buying and holding versus someone buying to make it their home right now. There’s super-high demand and reduced inventory.

“The pandemic changed the way people look at their house,” he adds. “A few years ago, it was all about the mobile lifestyle; live anywhere, work anywhere. Then you couldn’t go anywhere, so people began to see their home as a place of safety and security, as well as a workplace. It’s really a return to how past generations saw it.

“People want to have a safe and secure asset, and in this market they know they have something valuable. And on the other side, rents are going way up, so people want to buy before prices go even higher.”

Investors see strong upside

Also, many buyers are corporations looking to expand their holdings. The rise of online brokerages, coupled with investors who have the deep pockets and ability to wait out market fluctuations, mean many Nashville residential properties now serve as portfolio pieces versus lived-in homes.

“We work with a lot of investors, some in town and some out of town and out of state,” says Jon Sexton, president and CEO of NASHVILLE HOME, a team affiliated with Benchmark Realty. “Basically, Nashville real estate is a great place to put money right now, and with appreciation growing so fast they see what a great return on investment they can realize in a fairly short time or over a longer period.”

Investors also hold a significant cash edge in a market where money speaks with a very loud voice, says Nicolas Dobbratz, an affiliate broker with simpliHOM.

“These funds are buying real estate in targeted markets, and Nashville is one,” Dobbratz says. “Their sheer financial power allows them to expose themselves to higher risk. They can, and do, buy high and wait for the market to catch up to them. It’s a class of real estate investors who can afford to pay more for a property, and then sit on it far longer than a typical reseller would.

“They’re not someone who’s moving to a new city or having another life event and so needs to sell. They also benefit from rising rental rates, because that’s an option while they’re waiting to sell or make another move.”

Some investors are actual people, however, and see a residential property as both home and income opportunity.

“Most of my buyers are looking to make the property their home, and that includes some who are buying as an investment,” says Murn Roberts, an affiliate broker with the Morrell Property Collective of Compass Real Estate.

“By that, I mean they are looking to create an owner occupied, short-term rental space. They just may not be doing it right away because they need to get some work done, and some permits in place, and that’s taking a lot of time right now.”

Labor, supply shortages

Those property owners, as well as their more resale-oriented counterparts, are indeed having to play a waiting game. Don’t look for that to end soon as supply-chain, manpower and other issues continue over the next few months at least, even for those better positioned to weather the storm than others.

“Some people are looking for a property they can renovate and then resell, and a lot of those professional flippers have their own crew,” Jolly says. “If you don’t, it’s going to be very hard to get going on a project right away. Most people who have a team keep them working on a few projects at a time just so they don’t leave for someone else.”

All those owners, whether longtime renovators or new to the game, also must deal with local governments. Permits, inspections and other requirements are taking longer to overcome because city and county government agencies are swamped by demand.

“If you want to renovate in a big way, or tear down and rebuild, you’ve got to go through the planning and zoning commissions,” explains Jolly, who began his real estate career in 2005 after some time as a contractor. “If you are having trouble finding people to do the work, and it’s going to be weeks before you can get inspected, that adds to the time. It’s another reason people may be buying and holding versus buying and taking the next steps.”

He points to Williamson County, which has a single engineer dedicated to evaluating lots with a slope of 15 or more degrees. Those must be assessed because if they are built on, the resulting lack of ability to soak up rainwater raises the chances of flooding downhill.

“Last year we were delayed about eight months on the start of some construction because we had to wait for the inspector,” he says. “And that is going to continue because as more buildable land disappears, we’ll see more developments happening on hillier and less level land.”

Now add to that local government’s limited ability to keep up in terms of infrastructure – roads, water and sewer lines, schools – for larger, more suburban or even rural housing developments. That means those will come online more slowly, making “in town” housing stock even more valuable.

“Even if you just want to tear something down, it’s a long process,” adds Sexton, who got into real estate five years ago after a career path that included everything from health-club ownership to multiunit townhome development.

“Just getting someone to come out for the survey, and then getting someone to do the work. This is where there are a lot of shortages, and the people involved are doing the best they can. It’s just taking weeks, or months, instead of days.”

Roberts notes a buyer looking to buy a home at a lower cost and then spend $60,000 or so on renovations is having to run some new numbers.

“It’s hard to buy cheap and flip fast now,” she says. “What they thought might be $60,000 is closer to $100,000 due to supplies and crews being in short supply. So, someone may get a good deal, but then be forced to sit on that property for a while unless you’re an investor with the ability to spend a lot of money.”

Investors also have entered this niche, Sexton says, because they can overcome many issues that stymie the smaller players.

“It’s expensive to be renovating and flipping right now,” Sexton says. “If you don’t have your own crew, it’s almost impossible. The investors I have been working with have a team, or we help them find a team, who can do the work. Most, though, have their own vendors and are a one-stop shop for renovations, teardowns and rebuilds.”

“Let’s say you own a rental property, or you bought a house to flip or rent, and you call a plumber,” adds Dobbratz, who worked in a non-agent capacity in California’s commercial real estate market before becoming licensed here five years ago, and who increased his focus on real estate when the COVID-19 pandemic stalled his longtime career as a touring musician.

“They are four weeks out, at least, from even talking to you. And when they do come out, any early estimate they gave is likely to go up just because of the price hikes they are seeing due to supply-chain issues. That’s going to keep influencing what’s been a fairly quick and easily flipping situation here in recent years.”

Continued influx favors sellers

Another factor that would seem to play against properties staying empty? More people. It’s likely to come down to whether a property is more valuable sitting, occupied or sold.

“We haven’t seen the full brunt of Amazon and Oracle relocations,” Jolly predicts. “Some of those people will work remotely, but many of them will want to be in the urban center and all its amenities. That’s going to keep things where they are for the next few years, at least.”

He also dismisses the notion of a housing bubble such as the area and the nation experienced around 15 years ago.

“Prices are going to stay high until building catches up with demand,” he predicts. “That’s going to be five to 10 years. Also, if you look at Nashville’s housing history, we’ve only had one price drop since 1979, and we’ve had six recessions since then.

“That one price drop was the Great Recession back around 2008, and it was a worldwide, cataclysmic event. And we weren’t the “it city” back then.

“I think the rate of appreciation is going to slow down; we can’t sustain 23% increases every year, like is happening now. At some point, we’ll level off, especially if we’re seen as unaffordable, like the Bay Area. But we’ve got a long way to go before that happens.”

“People don’t mind buying and just sitting on property right now,” Sexton adds. “They like a neighborhood, and so they invested in it. They also know that right now, prices are setting records. Areas like Belle Meade or Brentwood are always going to be high and sell at the “A level.” But now you’re getting into the B areas or C areas, and those prices are adjusting upward.

“And the difference between the period from 2006 to 2008 or so is that then people who could not afford houses were buying them, and then those mortgages failed. Banks are now looking at someone who’s offering $100,000 over the asking price and making sure they can make up that gap in value.

“Interest rates are going to go up, which may slow things down, but I think values now are the new floor as far as appraisals go – and those are changing every two or three weeks.”

Homes are likely to keep moving at a brisk clip because, even with record highs, even nervous would-be buyers want to get in now, Roberts points out.

“Buyers are afraid to buy right now, because they’re afraid they’ll pay too much,” she says. “They also think that they need a lot of cash to make an offer, but I’ve been talking with lenders who are very busy with financing.

“I just went under contract with a home that’s being financed versus bought with a cash offer, so it’s possible. If you go that route, rates are starting to climb, so the sooner the better. Even if you are a buyer with a limited budget, there are still opportunities to win in this market.”

“Right now, if you own a house you can sell it,” Dobbratz points out. “Even a house needing significant work sells with no problem at all, even one in an area that’s not highly desirable, is going to sell.

Then the question is, do you do nothing, do you renovate, wait to sell at a higher rate or try to rent it out?”