Q&A: Institutional Builder Deals

This Q&A is brought to you from a real interview with Real International’s Founder and CEO, Lynn Yuan.

Q: The most puzzling question is: how are Austin housing prices compared to other markets in the country? Have they fallen so much that they are back to normal? 

The median price in Austin is now $450,000, which is actually down 6.3% compared to the same time last year. Looking at Austin’s 2020 and 2021-2022 (the epidemic), it can be observed that home prices have gone up around 80%. That’s definitely not normal. So the median price has dropped by 6.3%. It’s normal. It is a part of the upward trend that should fall back.

Q: Why have interest rates gone up so much? Austin home prices went up so high. Why didn’t they fall back so much? 

A: Well, there are 50,000 more jobs in Austin, meaning there are more jobs and people are moving in. So you’ve heard about new energy, like the auto industry. Tesla is moving its headquarters here, and there are also some supporting enterprises. For example, the production of batteries and new energy companies are increasing.

On the one hand, there are people being laid off while others are being recruited. So look at the unemployment rate in Austin now. How much is the unemployment rate? 2.7. How much is the national? 3.4. A lot of young people have not seen such high-interest rates, but it’s normal for us. In 2008, it was actually at this level. So we have been in the real estate business for more than 20 years. We’ve seen interest rates in the high teens, and we have also seen 8 and 9. So really, it is at a normal stage.

Q: We’ve seen the months of inventory in new constructions dilate greatly in the past few months. When should buyers go in?

Many people with a vivid imagination will protest: “Wow, the interest rate is so high. Builders must have a backlog of houses. I’ll wait until they can’t sell them to pick them up.” So isn’t this the right time? Let’s take a look. Let’s examine a few aspects of the data.

The first aspect is that, as we all know, at the end of last year, the cancellation rate was very high, 50%. That is to say, out of every two contracts, one of them is canceled. The second figure is the pipeline of the builder. He can’t stop once he starts to build a house. So the inventory at the end of last year can be said to be the highest.

At the beginning of this year, we began to see a different trend. From the builder’s point of view, they’re now in control – “We won’t build any more after we finish building all the current ones, or we will build even fewer” – so this year’s inventory will be greatly reduced. And from the beginning of this year to now, we’ve talked to all the builders, and what we found out was that the people who canceled their contracts last year have in fact come back because the houses are now once again in demand.

So now we are slowly looking at the amount of inventory. By the third quarter of 2023, inventory will be at a plateau. That is, at the end of last year, everyone was canceling their inventory. So we took a total of 50 houses.

Q: But those are long gone! How can I get in on these deals?

In March of this year we went back to the builders in Austin, but we’ve been all over and there’s not a single one. We’re waiting for the house to be built and for the price to go down, and we finally found a batch of houses that are scheduled to be built between June and the end of this year. The price has been reduced quite a bit, so we went to the second, third, fourth, and fifth builders to see what we can get. The most we can get is the land they haven’t built yet, which is called a finished lot. There are still some finished lots available for purchase, but if you buy one, you have to build it yourself. Many people imagine that builders have a large inventory and that you can pick up a bargain opportunity, but this is becoming less and less true. The range of bargaining is getting smaller and smaller, and this is a fact that we know from our personal experience in the real estate business.

Builders are human beings, and I’ve attended meetings with them in this industry. I know that they have a very well-developed system that adjusts to the ups and downs of the market. According to a graph showing the number of house approvals in Austin, during times of economic crisis when the economy is bad, the amount of approved houses automatically decreases. In 2022, it was almost 20% less than the same period. However, this year, I know of many builders who have put some of their land up for sale and stopped building on it. They will implement a very benign regulation, and the whole market will gradually adapt to this environment. High interest rates will slow down purchases slightly, but the demand for buying remains strong. Fresh demand is still present, and we are already witnessing this transitional phase from last year to now, which we call the trough stage, reaching a point of equilibrium.

Q: Why should I listen to you guys?

A: Real International has been in the Austin real estate business for over 20 years, and I myself have lived in Austin for more than 30 years. When the market is good, everyone is competing, and our advantage is not as noticeable. However, when the market is bad, our advantage becomes immediately apparent. We purchase land ourselves and also sell it to builders, so in Austin, we maintain a strong relationship with both large and small builders. We buy with institutional buying power when we visit the area, but our advantage is in offering individual investors a similar institutional buying opportunity and discount. We work directly with these developers, engaging with the most senior decision-makers in Austin. We visit their headquarters and evaluate which areas are better for renting and at what prices. Investors can enter this market with lower risks.

We own a significant amount of land in the downtown area, making it possible for investors to buy land there. There should be nearly 300 houses, but at this price, construction costs remain relatively high. We plan to hold onto the land here because the more land we reserve, the higher its value, especially in the city center where buildable land will only become scarcer. We also have these two lots in Round Rock, and we are collaborating with a builder called Masonwood. Additionally, we are developing and managing a piece of land ourselves. Throughout the entire process of buying and selling land to builders, we have established a strong cooperative relationship.