Saturday, June 4, 2011

THE WOB IN THE MOB

Having spent a lot of time around real estate investors (and being one myself), there's always chatter about the next "hot" area, or how Light Rail is going to affect values over the next decade as spurs shoot out from Union Station into Golden, Lakewood, Arvada and DIA.

Investors are always trying to think two steps ahead of the market, and that's a good practice.  But for safety and value, nothing beats the "WOB in the MOB".

Simply put, the WOB in the MOB is the worst house on the block at the median price or below.  The reason this type of home has so much upside is because while improvements your neighbors make can help your value, there's very little that can happen that will undercut it.  And because you're buying the worst house on the block (in theory), you have the most ability to improve it and bring it up to the standard of the area around you.

Good investors want control of their investments, and WOB/MOB fits this model.  Buy it right, fix it up, and ride the coattails of your more well-to-do neighbors.

Of course, the opposite of this corollary also holds true.  To buy the biggest home on the block (especially at the higher end of the market) becomes the riskiest, most speculative type of purchase out there because, to a large extent, you are at the mercy of your neighbors.  If a house gets foreclosed on and the bank sells it for cheap... the biggest loser is YOU.  If someone lets their yard go and the character of the neighborhood is affected, the biggest loser is YOU. 

Without a doubt, the "McMansion" buyers of ten years ago today live in a world of regret and blown equity.  To buy an overpriced, non-conforming home in an area of less expensive homes has almost universally been disastrous, and today there are simply few buyers for these types of homes (and especially not at retail prices).

The real estate market of 2011 is all about caution, with buyers ranking perceived value above all else. 

Real estate investors know the WOB in the MOB model fits this paradigm, and they are profiting handsomely from this new reality.