Dixon Advisory fund pays more than double recent sales prices for some high-yielding US property after quick refurb

As we look back on 2011, Property Observer is republishing some of our most noteworthy stories of the year.

The now fire-damaged house at 42 Bartholdi Avenue, Jersey City, New Jersey sold for $114,000 in August this year to the Australian-listed US Masters Residential Property Fund headed by Alan Dixon.

The colonial-style property (pictured above) had sold at $49,569 just three months earlier in a repossession sale.

“We’re comfortable that at $114,000 there was plenty of upside in it for us,” Alan Dixon told Property Observer after an analysis of the fund’s most recent acquisitions found 19 of the 34 identified in the fund’s prospectus were bought for a price substantially higher than the last, but recent, sale price.

“In simple terms, property that is being bought for $114,000 has around $250,000 to $280,000 worth of construction value within five kilometres of Manhattan,” Dixon suggests.

“The $49,569 price in a repossession was excellent buying for the party who vended the property to us,” Dixon concedes.

“But in addition to $49,569 they will likely have paid a variety of liens against the property of things such as municipal liens (water/sewerage, local tax), possibly federal tax, bank fees or so forth.”

"For every single property we buy, we do a very detailed inspection and analysis of properties in the area, including looking at comparable sales for equivalent properties in the area.  I’m very comfortable we are not paying above market, in some cases we’ve got incredible deals, in many cases we’ve simply met the appropriate market price," Dixon says.

Dixon acknowledges whatever the vendors spent they achieved “a good profit on the sale to us”.

"Many of the properties we have bought were recently owned by another party," he says. "There are two types of property that fit that category, ones with a small differential and ones with a large differential between the two prices.

"With a relatively small differential it reflects someone picking up a property at a depressed price, perhaps through a short sale or some other complex process where it didn’t enter the regular market and when the property is offered to us there is still enough differential between the price offered and the market price that we are comfortable to proceed," Dixon says.

"The fact that another party got involved and made a small profit doesn’t concern us if we are still buying at or below the market price and the price meets our return hurdles. Given we now have closed on approximately 80 properties and have over 100 tenants we are able to forecast / estimate returns very accurately given our in house market knowledge and data. In addition to assessing the property at a market level, we also place great emphasis on the property meeting our conservative financial hurdles, which ultimately is of significant importance to our investors."

The US Masters Residential Property Fund, managed by Dixon Advisory is in New Jersey to buy high-yielding property, but perhaps ominously in some questionable neighbourhoods, as less than four weeks after the Bartholdi Avenue purchase a two-alarm fire broke out at the house. The freelance news photographer Joe Shine was on the scene as firefighters raced to fight the blaze shortly after midnight. No one was hurt and the fire is still under investigation.

The insurer, Lloyds of London, has since paid a $200,000 settlement, and Dixon is comfortable the money will allow the fund to end up with a rental property that is completely renovated.

"The other situation is where there is a big differential between the two prices because they’ve had to do very substantial work to make the properties saleable and leaseable.  We’ve consciously done this because it has often lead to result in a finished, completely renovated property at or below the market price.  Whilst the renovator/developer will have made a profit, it will not come without the substantial risk of doing major renovations and building work," Dixon says.

"The concept that we should be the ‘first buyer’ of all these properties would basically turn the fund in to a construction company.  Yes, we are prepared to do work internally that is of the right size and costing to add value.  We have already completed 24 construction jobs and have another 15 in progress.  All these jobs have been up to $20,000 in value.  Whilst we have the skills internally, we have decided at this stage not to do major rehabs preferring to take them off developers.  However, we continue to assess each property on a case-by-case basis and from time to time will do some bigger jobs, however, we will not be making this our primary business."

Property investment commentator Monique Sasson Wakelin has slammed the acquired rental properties after a recent trip.

Without any reference to the sales history, she advises the purchases demonstrate a “worrying lack of understanding of what constitutes investment-grade property”, and “ongoing zeal for financial engineering and lack of property knowledge”.

She says many “unsuspecting Australian retail investors” have bought “some very speculative assets”.

“By going for high yield and low prices, the fund has chosen poor assets in highly compromised locations with no scarcity value,” she says in an article for The Eureka Report.

Dixon has responded saying in part: “We didn’t take a day off on our holidays – we spent months and months researching and talking to the US’s leading economists, property professionals, money managers and investment bankers to make our decision.” 

But the Property Observer analysis suggests the now-fire damaged Bartholdi Avenue property  was not the most dramatic price difference on last sale by the fund over recent months.

A single-family house at 89 Bostwick Avenue, Jersey City, NJ sold to the fund at $235,000 in September. The property previously sold for $62,000 in May.

There are 19 acquisitions among the 34 identified in the US Masters fund prospective where the latest purchase price sits substantially above the last sale price. All up the fund, which expects annualised net yields between 8% and 12%, has bought 127 properties for a $24.5 million total as at October 31 this year.

“We know the history on all of them and are very confident of our buying process,” Dixon says.

“I'd be able to show you scopes of work etc on all properties that more than cover the difference,” he says.

Dixon cites a single-family house at 73 Warner Avenue, Jersey City, NJ bought for $185,000 recently.

US land title records reveal Dixon’s spent $65,000 more than the property’s previous $120,000 sale in June this year.

“73 Warner Ave is one of the properties where we did a complete turn-key renovation deal with the vendor,” Dixon says.

“The property was in need of a major rehab when the vendor purchased it and they purchased looking for someone like us to take them out of a property that is fully renovated and ready to rent.

“Typically they make a decent development profit, but we’ll get the property in better condition but a little cheaper than the going market rate.”

He says on 73 Warner, the fund replaced one of the boilers; reinstalled and restored the hallway on the first floor; repaired and renovated the kitchen on the first floor; installed a built-in wardrobe and sheet rock for an extra bedroom on the first floor; installed a built-in wardrobe and sheet rock for an extra bedroom on the second floor; completely gutted and replaced a kitchen on the second floor; and fully carpet the entire house.

“On properties that have needed (substantial) work, we have determined what we think fair value would be with a full renovation and negotiated a turn-key as complete price,” he says.

“We have only done this with vendors with a good reputation in the marketplace for doing quality work and we inspect thoroughly before we finalise the purchase.”

Dixon points to two examples of properties that he says will reap high rewards:

• • Property number 1: 89 Bostwick Avenue, Jersey City.  This property is located in the Greenville section of Jersey City.  As you note it was sold for $62,000 in May 2011.  It is on a large block for the area and consists of four separate apartments all on the one title.  There is one  three-bedroom apartments and three two-bedroom apartments.  I.e., the property has nine bedrooms and four bathrooms.  Our estimate is that actual construction costs with no margin for development profit or risk would total around $120,000.  The property was offered to us both in its wrecked state or to agree on a fully renovated basis.  We chose to elect to purchase the property fully renovated for $235,000.  We got completely new kitchens, bathrooms, carpeting, heating, roofs, internals and so forth for four apartments for a total of $173,000.  I.e., about30 rooms fully renovated for $173,000.  I was there on the day we closed on the property and it was a very high-quality job inside.  We think it was a very good deal.  We will get net yields out of the property (before fund management fees) of over 12.5% per annum.

• • Property number 2:  2A Dwight Street, Jersey City.  This is also located in the Greenville section of Jersey City and is one of only two single-family properties we have.  Again, this property at $30,000 was an unliveable wreck.  To give you some valuation indications, we now receive rent of $1,600 a month for the property or $19,200 a year.  Properties trading at $30,000 are unliveable in our target area. This was bought by a developer and we were not shown it when the first transaction occurred as it was prior to the commencement of the fund in May.  As such, we cannot estimate how much the developer will have spent on repairs, but it will have been substantial.  When we first inspected the property on 20 July 2011, the renovation was already about 90% complete but consisted of new bathrooms, new kitchens, full painting, new carpets and so forth.  A brick residence and single family it was quite unique on the rental market and leased within a week at $1,600 a month.  We think that $85,000 differential for a completed fully renovated house is a very good deal for the fund, as comparable transactions would suggest the property is worth $125,000 plus.  Yes, the developer will have made a profit on the deal but not so substantial that it is not a very good buy at the price.  We are getting net yields of around 10% from this property.

Dixon says tenants pay a high premium for renovated properties in the area.

“Interestingly, because the property market has been falling for five years and is so depressed, a lot of owners are not keeping their rental properties up to the sort of standard you would normally expect.

“As such, when a renovated property becomes available on the rental market, it is very popular and you can get really high-quality tenants,” Dixon suggests.

Other properties in the fund’s portfolio include:

• A $242,000 purchase at 198 Bergen Avenue Jersey City, NJ in August had previously traded hands for $67,000 in April.
• A house at 278 Winfield Avenue, Jersey City, NJ was sold for $235,000 in September. It had previously sold for $173,000 in June 2011.
• A single-family home at 16 Weldon Street, Jersey City, NJ was bought for $199,000 in October. The 1900 property previously sold for $85,000 in September.
• A single-family house at 17 Bergen Avenue, Jersey City, NJ sold for $155,000 in October. The property previously sold for $80,000 in September.
• A single-family house at 268 Bergen Avenue, Jersey City, NJ sold for $184,900 in October. The property previously sold for $75,000 in October 2010.
• A single-family home at 73 Warner Avenue, Jersey City, NJ sold for $185,000 in September. The property previously sold for $120,000 in June.
• A house at 136A Clendenny Avenue, Jersey City, NJ sold for $225,000 in September. The 1900 property previously sold for $180,000 in July last year and at $125,000 in January 2010.
• A single-family home at 111 Winfield Avenue, Jersey City, NJ sold for $162,000 in September. The property previously sold for $110,000 in March 2009.
• A property at 112.5 Orient Avenue, Jersey City NJ sold for $112,000 in September. The property previously sold for $100,000 in 2008 having sold at $255,000 in 2006.
• A single-family home at 202 Delaware Avenue, Jersey City, NJ sold for $125,000 in September. The property previously sold for $75,000 in August.
• A home located at 66 Gardner Avenue, Jersey City, NJ sold for $235,000 in August. The property previously sold for $175,000 in 2008.
• A single-family home located at 146 Stevens Avenue, Jersey City, NJ cost $189,000 in August. The property previously sold for $100,000 in December 2010.
• A home located at 120 Orient Avenue, Jersey City, NJ sold for $175,000 in July this year. The property previously sold for $50,400 in October last year.
• A home at 69 Belmont Avenue, Jersey City, NJ sold for $205,000. It last sold in 2008 at $145,000.