The Capitol City's Market Is More Complex Than You Might Expect
This article was originally published in the April 2018 Think Realty Magazine.
When the national housing market collapsed in the mid-2000s, Washington, D.C., homes lost nearly $120,000, on average, from their overall value. Median home prices in the area bottomed out in July 2009 around $355,000, a steep fall from values of $435,000 just two years earlier. For a market that had grown accustomed to double-digit annual appreciation rates over the course of the early 2000’s, it was a hard fall to handle. In fact, the Capitol still has not achieved official recovery status, since home values fell 27.5 percent during the crash and have recovered 24.4 percent of those losses. A market is not considered fully recovered until it recovers all ground lost in the downturn. D.C. market values are, overall, still between nine and 10 percent lower than peak values prior to the housing crash.
Investors should note, however, that some areas in D.C. proper and the Arlington, Virginia area have exceeded those peak prices and are starting to level off. “You can see it, in particular, in D.C. proper,” said Brad Chandler, CEO of Express Homebuyers, which operates in the greater metro area of the city. “Even with extremely tight inventory in that area (two months or less), we aren’t seeing much in the way of price appreciation. With that kind of inventory, D.C. proper still only saw about two percent appreciation over the course of 2017.”
Despite not yet having achieved the official-recovery benchmark on a broader scale, the D.C.-area housing market is certainly growing and gaining value. Think Realty contributor Ingo Winzer recently observed in Forbes the three-year price growth forecast for the area is about 11 percent and warned that an attractive, high-growth market like D.C. could become overpriced in the next few years. Craig Fuhr, a Maryland-based fix-and-flip investor and founder of FlipClub, described his market as “hot, like 2004 again.” Fuhr’s retail buyers often have work-related interests in the D.C. area or work for the federal government. He added, “Right now, it’s a little troubling to see the number of rehabbers and even wholesalers who are signing high volumes of contracts and holding inventory or who have as many as eight houses going at once. I don’t think the market can continue up at the rate it’s going right now.”
Investors should note that some areas in D.C. proper and the Arlington, Virginia area have exceeded those peak prices and are starting to level off.
“We’re actually winding down our portfolio in the Washington, D.C., area right now,” said Chandler. “We had about 80 rental units we bought when the market took a dive between 2009 and 2012. We’ve decided to sell them all because we feel like we could be nearing the top of the market. We are expecting things to plateau in the near future, then stay at for a while,” he added. Chandler said that his company plans to focus exclusively on wholesaling in the D.C. area in the next 12 months. is strategy has the advantage of a fast turnaround that allows investors to get in and out of deals quickly and that many consider optimal for hot markets where lots of buying activity puts sellers in a prime position. “We just looked at how much that portfolio had appreciated since we originally bought it, between 35 and 40 percent in a lot of those cases, and we felt like it made more sense to redeploy that money into our core business,” Chandler explained. “Anytime you buy an asset and it goes up 30 percent, then sure, it could go up another 30 percent or it might not. Since yields on single-family residential properties in this area are also getting lower, it was time to let go,” he concluded. Vernon Vaughan, a local fix-and-flipper, agrees D.C. is not necessarily optimal for buy-and-hold strategies right now. However, he plans to remain firmly ensconced in the local rehab scene. “D.C. is a city that is bursting at its seams with a lot of the suburban population actually shifting back into the city,” he explained, noting that this trend is not unique to the Capitol area. “I think the American Dream used to be a house in the suburbs with a white picket fence, green grass, fresh air, and parks. Now, if you can get past the sticker shock, living in urban areas offers your family just as much, if not more, access to the services and amenities that used to just be part of the suburban lifestyle.”
Vaughan, who is also a partner at Capitol Gateway Development and a managing partner at Realstar Properties, which buys and sells properties in Maryland, D.C., New York, New Jersey, and North Carolina, has been flipping properties in the area for nearly 15 years. “We’ve definitely been through the full market cycle,” he observed. “We cut our teeth doing rehabs in areas like suburban Maryland, Baltimore City, and Baltimore County.” Realstar specializes in dealing with older housing inventory and extensive rehabs, which Vaughan said is the key to getting good deals in a real estate market where an investor’s main competition for a deal may be a retail buyer ready to pay cash.
“D.C. is one of the few markets where you have a lot of people who are not investors who have cash on hand and are ready to buy the same properties that investors are looking for,” he said. “They hire architects and put enough into the property that when they are done, although they may not have much (if any) equity, they have the house of their dreams in the location of their dreams. The ROI is that they have their dream house, and that can make it hard for an investor to compete.”
Nikki Ryan, a Realtor with Keller Williams Realty in Reston, Virginia, agreed. “Buyers are looking for updated properties where they don’t have to do any upgrades or renovations, and inventory is so tight it is hard for them to and what they want,” she said. “Houses that have been on the market for a long time are now selling, and if you have a less-than-optimal-condition house to sell, now is the time.”
Sherman Ragland, Dean of Realinvestors Academy and a commercial real estate broker working in the D.C. metro area, noted that millennials are having a big effect on the region’s housing market. “Every neighborhood in D.C. is popping, quite literally, as the predominant rehab style is the ‘pop-up,” he said. “A pop-up is where a rehabber acquires a two-story townhouse and ‘pops up’ a third, sometimes even a fourth floor and converts the house to a multi-unit condominium.” Ragland went on, “ these pop-ups have become so prominent that some neighborhoods are now aggressively seeking legislation to prohibit them, but they are extremely popular with D.C.’s growing young, affluent population.” Ragland described D.C. as becoming “a city of condo owners,” which can be a good thing for real estate investors. A side effect of the burgeoning millennial population has been a surprise to him as well: “The number of restaurants and neighborhood retail popping up to serve the needs of this booming population has become fantastic. D.C. has officially been named a ‘City for Foodies,’ which many of us old-timers never saw coming!” he laughed. Ragland has been investing in the market full-time since 2001.
The History Of Construction And Building Despite The Odds
Growth never ceases in our national Capitol. In fact, from the time George Thompson and Thomas Gerrard, who received the original colonial land grants in the area in 1662, arrived in the colonies, the D.C. area has, essentially, been on a long run of growth and expansion. The D.C. metro area, first described by the federal government as “a permanent seat of government not exceeding 10 miles square [100 square miles],” has been on a growth path since first President George Washington first annexed the town of Alexandria, Virginia, to be part of the federal district and, as a result, expanded the Capitol’s starting footprint before the ink was dry on the original papers.
Since that time, Washington, D.C. has steadfastly continued to build, expand, and grow. During the War of 1812, the U.S. Capitol building was burned (along with much of the rest of the city) and reconstruction immediately commenced. Neither did the Civil War slow development down; President Abraham Lincoln insisted that the bloody battle between the states not halt construction on the U.S. Capitol then, either. Even when Alexandria County, today part of the state of Virginia, petitioned to be removed from the District of Columbia in what became known as “the retrocession,” the area’s influence continued to spread both in terms of creating desirable housing markets in the surrounding areas and affecting new-construction trends.
“We are in the ‘construction-and- inventory’ phase of the real estate cycle right now,” observed Fuhr. “When you start to get out from under a debacle, like a housing crash, it creates demand and inventory goes down, which causes builders to start trying to build at a breakneck pace.”
“We are in the ‘construction-and- inventory’ phase of the real estate cycle right now,” observed Fuhr. “When you start to get out from under a debacle, like a housing crash, it creates demand and inventory goes down, which causes builders to start trying to build at a breakneck pace.” Fuhr predicted that the entire region could continue in that phase for “several” more years, although he added the caveat that housing affordability could abbreviate it. “I have to wonder how people are going to be able to buy those houses,” he said, adding, however, “In Maryland, we’re insulated by the federal government and the few million people who work for it. at insulation affects D.C., northern Virginia, and Maryland.”
“The federal government jobs play a huge role in the region,” agreed Chandler. “It’s the government that fuels the area and drives prices up the closer you get to the metro area.” Chad McCall, co-founder of the Creative Wealth Academy with partner Brad Quintana and active on both the rehabbing and lending sides of D.C. real estate, noted properties in extremely attractive areas of the city, such as the areas where politicians live within the city proper, often never even go on the market.
“It’s really interesting to watch over time,” he said. “Politicians tend to sell their homes to other politicians.” McCall added, “Of course, probably the majority of people who work in D.C. live outside of D.C. as commuters.” McCall considers properties 45 minutes away from the metro area to be particularly attractive but emphasized investors should do their own investigation into traffic patterns rather than relying on the distance to determine which properties are, in fact, 45 minutes away. “Traffic can be really bad up there, so you have to do your research,” he said.
Finding and Doing Deals In D.C.
In markets like D.C. and its surrounding areas, it can be hard for real estate investors to and properties that work for their investment strategies, especially if they prefer to fix-and-flip and need to buy at a discount in a market full of retail buyers also willing to pay cash and close quickly. “You make your money when you buy in real estate investing,” observed ATTOM Data Solutions vice president Daren Blomquist. “Sure, selling high is good, but if you cannot buy at a deep enough discount, you will have a hard time making a profit.”
“A lot of people are overpaying for properties right now in our area,” observed Vaughan. “They have a different frame of reference because they have access to private capital or cash on hand and are competing with each other and retail buyers. For investors, if the market slows, those buyers are going to get hurt.” To lessen the competition, Vaughan’s company focuses on older properties and properties he describes as “rehabs that would scare most people.”
“Competition is so tough, deals can no longer be found on the MLS,” he said. Instead, investors are using direct marketing to reach owners who may be willing to sell at a discount.
“We buy properties that need foundation repairs, that are heavily fire-damaged, anything that looks really, really serious,” he explained. “If nine out of 10 investors back away, that is the property we buy at a great price, add value, and make great returns.” In the D.C. area, “older” properties tend to be between 40 and 60 years old. However, Vaughan noted, “In Baltimore and D.C. proper, it is very common to rehab houses that were built in the 20’s or 30’s. Row houses in these markets are definitely, some of the oldest inventory in the country, and you have to remember that with older housing inventory, your renovation costs go up because you have to replace, update, and upgrade not just the floor plan, lighting, and other amenities, but also add bathrooms, make sure electrical and plumbing is up to code, and maybe finish the basement.”
Chandler added that finding deals in the D.C. metro area using “traditional” venues, such as the multiple listing service (MLS), is nearly impossible in his experience. “Competition is so tough, deals can no longer be found on the MLS,” he said. Instead, investors are using direct marketing to reach owners who may be willing to sell at a discount.
Some, like Chandler, market on radio, television, and online to reach their target market. “We also mail thousands of postcards a month,” he said. McCall, on the other hand, focuses on physically reach- ing sellers as soon as possible once they may be inclined to sell. To that end, he sends his teams straight to the courthouse record rooms to create lists, on-site, of owners who are in probate or experiencing other real estate-related distress. “A lot of people don’t want to be hands-on with lead generation, and if you want to buy a list of leads for a market like D.C., that’s fine,” he explained. “However, in a tough market like D.C., if you reach those leads before anyone else, you will have an advantage.”
Carole VanSickle Ellis is the editor of Think Realty Magazine. She can be reached at firstname.lastname@example.org.