I have received several questions from clients the current state of the real estate and rental market through the Smokies. I thought I would post my analysis for all to see the Sevier Local area housing market, foreclosures, porta cabin near me and the impact of the “real estate/mortgage bubble” on the local rental management companies. Below is my sometimes critical and as sel-explanatory as possible analysis of the market.
The overnight cottage rental business realized a reduction 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 disheartened some visitors from traveling here and some from making plans to visit during the later months or at least waiting to book their vacations. The good cottage management companies modified quickly once they located the realization their occupancy was not often it was in the past by offering rewards. The rental management companies typically offer some sort of “incentive” such as stay 5 nights get the sixth 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 since the reason for them not making the trip — gas prices. So, they advertised on their websites things such as Summer Gas Rewards — 10% off cottage leases and things of these nature. For instance, a cottage that would typically rent for $200 per night would be a savings of $20 per night and the typical summer stay are at least 3 or 4 days, so it was enough of an bonus 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 cottage owners, but far outweighed the alternative of having no 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 discover the cottage 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 modified quickly to the gas increases seem to be doing fine and actually are on par with past years.
In talking with distinctive 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 leases for several cabins seem empty for May when i looked at them in May & August and then all of a sudden it was reserved for virtually the entire month. I am uncertain 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. Next to your skin laughed and said the cabins leasing the most (at least with one of these 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 nowadays. 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 holiday with a couple kids can stay in a 1 BR cottage and it still works for them because the cottage may sleep 4. So, the requirement for the cabins in the 2-4 BR range is less than that of a 1 BR cottage. Although, I need to also say there have been quite a few one bedroom cabins built!
Cottage leases appeared to 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 by the time of 2005 there were many large developments and PUD’s with cottage upon cottage built in a short amount of time. The demand did not increase, but the method of getting 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 outdated as far as the amenities a visitor is seeking 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 exemption is a cottage with a tremendous view or on a river — these cabins continue to do well even if they are older and outdated. Thankfully, with the downhill trend of the housing market, new cottage builds have slowed dramatically, allowing the supply versus. demand find a better position than the quick growth period of 2005-early/mid 2007.
As far as the housing market is concerned, in my opinion, I have no signals of prices regaining right now. I do not think they have a lot of room to go lower, but also do not think we have hit bottom yet. In 03, I believe it was, I showed a 6 bedroom, 6. 5 bath in Black Bear Form with a fairly good view. It was on the market for $399, 000 and I thought this became 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 my children and I considered purchasing it ourselves for investment. We wound up not buying it and it sold for $375, 000 not too long afterward. Just lately the same type of cottage in Black Bear Form came on the market completely appointed as a foreclosure with a much better view and now it is in contract for $369, 000. So prices have without question seen diminishes (particularly in some 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 happens 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 occasionally that will cash flow, but a large proportion still do not. When a large area of the cabins hit the point where they cash flow I believe which will 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 should go down again and I think there will be a recovery. I cant predict when the period will be, but I really do try to have as much data as possible and analyze the market very carefully.
Currently, the developments with foreclosures are Black Bear Form, Hidden Springs Resort, and Covered Bridge Resort. This can be caused by buyers paying outrageously high amounts for cabins at the peak of the market and the cabins never realizing the gross rental income these were “projected” to have. The majority of foreclosures are spread occasionally, other than the three I mentioned above and Sky Have (just due to its sheer size and large number of cabins). A lot of the good deals in Black Bear Form have already been picked over, but there will automatically are more foreclosures upcoming. Hidden Springs Resort has experienced the most recent say of foreclosures, which was predictable as i had viewed many of them in a “short sale” status.
In summary, 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 in 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 cottage does enter into foreclosure — either the proprietor paid too much for the property, the cottage was not suitable for a well performing rental cottage, or the proprietor simply is facing troubles in the economy. Unfortunately, many cottage owners are up against all three situations at once which usually leads to a situation difficult to recover. A lot of the cabins doing foreclosures do not have good views or other attributes and amenities required for a well performing rental cottage.
I believe my useful skill is to determine these properties and determine which are the most appealing as investments by analyzing the potential rental income a cottage should generate. For example, if there is a in foreclosure cottage with a good view, all the modern amenities, and in a well established and proven development it will typically be a good cottage to consider because it should work as a rental. Situations where an owner who in foreclosure and paid too much for the property or faced other economic difficulties are the type of cabins to concentrate the searches. Buying a cottage that in foreclosure due to the flaws of the cottage itself usually leads to just more troubles unless the cottage is purchased at an extremely low price. Purchasing a cottage it does 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 cottage that lacks the required steps to be an excellent performing rental — even if you did purchase it at what is perceived as a “good deal”.