I have received several questions from clients about the current state of the real estate and rental market in the Smokies. I thought I would post my analysis for all to see about the Sevier Regional area market, foreclosures, and the impact of the porta cabin near me “real estate/mortgage bubble” on the local rental management companies. Below is my sometimes critical and as self-explanatory as possible analysis of the market.
The overnight home rental business realized a decline in business during the early summer months (compared to the same time frame in previous years) when gas prices spiked to around the $4 mark. I think it dejected some visitors from traveling here and some from making plans traveling during the later months or at least waiting to book their vacations. The good home management companies designed quickly once they visited the realization their occupancy was not – it was in the past by offering pay outs. The rental management companies typically offer some sort of “incentive” such as stay 5 nights get the 6 night free or something along those lines. But a few management companies were smart and tied their discounts directly in to what the consumer was seeing that the reason for them not making the trip : gas prices. So, they advertised on their websites things such as Summer Gas Pay outs : 10% off home space leases and things of the particular nature. For instance, a home that would typically rent for $200 per night would be a savings of $20 per night and the typical summer stay is in least 3 or 4 days, so it was enough of an compensation to entice the visitors to book the cabins. The average visitor to the Smokies is not extremely affluent, they are your normal average joe for the most part. This ultimately resulted in slightly less rental income for home owners, but far outweighed the alternative of having no space leases at all!
Some management companies did not adapt as quickly and I believe they are suffering because of it. The vast majority of people who rent cabins do two things: drive to the destination and find the home they end up staying in on the internet. The management companies who capitalized on both of these by placing in the top in Google Searches, use pay-per-click advertising and designed quickly to the gas increases seem to be doing fine and actually are on par with past years.
In talking with many different rental management companies, they are seeing a few differences from the past. First, people are not booking rooms as far in advance. I have seen the space leases for several cabins seem empty for September when i looked at them in May & Summer and then all of a sudden it was arranged for virtually the entire month. I am undecided the reasoning behind this, but I would think with the economy facing its struggles and gas prices fluctuating people are waiting to know their financial condition closer to the date of their vacation. The skin said the cabins booking the most (at least with your specific companies) are the smaller cabins or the very large cabins where groups/families come to meet. So the 1 BR cabins along with the 4+ bedroom cabins tend to be the ones with the best rental histories currently. The mid-range sized cabins such as 3-4 BR cabins are not performing as well as they had in the past. For instance, a small family coming on a break with a couple kids can stay in a 1 BR home and it still works for them because the home may sleep 4. So, the necessity for the cabins in the 2-4 BR range is less than that of a 1 BR home. Although, I must also say there have been quite a few one bedroom cabins built!
Home space leases did actually peak in the period prior to 2005 when there was a great demand for cabins and the supply was still not up to the demand. Close to the time of 2005 there were many large developments and PUD’s with home upon home built in a short amount of time. The demand did not increase, but the cause of cabins increased dramatically, causing the overall gross rental income for many cabins to go down. The cabins that were built in the 1990’s and old as far as the amenities a visitor is looking for saw the largest decline. These cabins now are sort of phasing themselves out as rental properties as they become older and not performing as well as they had in the past. The one omission is a home with a tremendous view or on a river : these cabins continue to do well even if they are older and old. Thankfully, with the downward trend of the market, new home builds have slowed dramatically, allowing the supply compared to. demand find a better position than the quick growth period of 2005-early/mid 2007.
As far as the market is concerned, in my opinion, I have no clues of prices recouping right now. I don’t think they have a lot of room to go lower, but also do not think we have hit bottom yet. In Goal, I believe it was, I showed a 6 bedroom, 6. 5 bath in Black Bear Shape with a fairly good view. It was on the market for $399, 000 and I thought this has been a decent deal due to the rental income potential I was aware of and had looked at for comparable cabins in the development. When it dropped to $375, 000 I thought it was a good deal and his dad and I considered purchasing it ourselves for investment. We finished up not buying it and it sold for $375, 000 not too long afterward. Just recently the same style of home in Black Bear Shape came on the market completely provided as a foreclosure with a much better view and now it is in contract for $369, 000. So prices have without question seen is reduced (particularly in a few developments facing a lot of foreclosures) from the beginning of the year to now. The reason I believe there is still room for the prices of cabins to go down is really because even at current foreclosure prices, most cabins do not cash flow with 20% down after paying 40% to a rental management company and all the utility expenses, taxes, homeowners insurance, etc. There are a few cabins here and there that will cash flow, but the bulk still do not. When a large component to the cabins hit the point where they cash flow I believe which is to be the turning point as investors see the cabins as a wise investment and while there is a lot of inventory of good deals they will begin buying again. As they begin buying at the point where quite a few cabins cash flow, the inventory is going go into reverse and I think there will be a recovery. I cant predict when that point will be, but I try to have as much data as possible and analyze the market very carefully.
Currently, the developments with the most foreclosures are Black Bear Shape, Hidden Springs Resort, and Covered Bridge Resort. This can be assigned to buyers paying outrageously high amounts for cabins at the peak of the market and the cabins never realizing the gross rental income we were holding “projected” to have. Almost every other foreclosures are dispersed here and there, other than the three I mentioned above and Sky Possess (just due to its sheer size and large number of cabins). A lot of the good deals in Black Bear Shape have already been picked over, but there will definitely a little more foreclosures upcoming. Hidden Springs Resort has experienced the most recent inflow of foreclosures, which was predictable as i had viewed many of them in a “short sale” status.
To conclude, my opinion of the market is that it has some room to go down in prices still with the rental investment cabins. Many of the the foreclosure cabins even at drastically reduced prices do not necessarily make a good investment in terms of cash flow. There are typically a few reasons a home does enter into foreclosure : either the master paid too much for the property, the home was not suitable for a well performing rental home, or the master simply is facing troubles cheaply. Unfortunately, many home owners are confronted by all three situations at once which usually leads to a posture difficult to recover. A lot of the cabins entering foreclosures do not have good views or other attributes and amenities necessary for a well performing rental home.
I believe my useful skill is to evaluate these properties and determine which are the most appealing as investments by analyzing the potential rental income a home should generate. For example, if there is a the foreclosure home with a good view, all the modern amenities, and in a well established and proven development it will typically be a good home to consider because it should succeed as a rental. Situations where an owner who the foreclosure and paid too much for the property or faced other economic difficulties are the type of cabins to target the searches. Buying a home that the foreclosure due to the flaws of the home itself usually leads to just more troubles unless the home is purchased at an extremely low price. Purchasing a home that will not have a good view, does not have an open floor plan or large windows, and does not have the amenities visitors desire still leaves you with a home that lacks what it takes to be an excellent performing rental : even if you did purchase it at what is perceived as a “good deal”.