Every now and then I get an email from someone who wants to know if now is a good time to invest in short sales. Not only that, L forwards me a couple of the mountain of real estate guru spam a week he receives. These gurus are typically agents who can’t seem to make any money selling real estate themselves, so they make money telling you how to buy it. Most of what the gurus are hyping these days are foreclosures and short sales. [Short sales, for the uninitiated, are sales where the lender agrees to take less than what is owed on a home.]
In what is a rather unusual moment for me, I’m finding myself in agreement with Mark Bosworth, who owns a real estate investment and management firm in Phoenix.
Mark Bosworth is a self-described real estate expert and investor in Phoenix. His "Investor’s Corner" is found in the Arizona Republic every week. I tend to differ with his bullish approach to investing in the current market, but yesterday’s article in the Republic [No link available] made way too much sense not to share. Bosworth outlined what it takes to make money in short sales:
For those of you who are serious about a new job in short sales:
Learn how to convince a seller in a bad situation to walk away from their home for your benefit. Now get a financiallly savvy lender to accept less than they are owed. You must have substantial capital- even if your polished negotiation skills land you an unbelievably discounted price, you still need to write the check. You need to be an expert at project costing, great at major repairs, and have dirt cheap contacts for getting lots of work done fast. Any items you hire out mean less profit. Finally, you have to sell the property FAST for top dollar even in a buyer’s market.
The potential gain is marginal compared to the catastrophic loss if you miss your numbers and find surprises. If you have to discount the sale to avoid the all too common 6-12 month sales times in a buyer’s market, you are sunk.
If you still think you have what it takes to make it in the short sale market, beware. You could become part of the real estate food chain. I’ve seen REO listings where some investor wannabe had his short sale bargain go into foreclosures when he couldn’t flip it, or underestimated the costs and couldn’t fix it.
Be assured that when it does go into foreclosure though, the real estate gurus will be doing foreclosure seminars to show others how they can benefit from your misfortune.
Prices in Colorado are down 25-30% and my lease is coming due in a couple of months. Owning vs buying is about a 25-40% premium to buy. I am tempted but would like input from someone in Phoenix. Adjusting for size roughly 450000 here vs 4.5 million there. 55000-57000 listings there vs 5400 or so here.
My point is I feel you guys are roughly 6 months ahead of us on trend. Do any of you feel now is a good time to bargain hunt there. If not I think I should rent.
Sequoia:
Seriously? You’d consider buying in this environment? It seems to me a recipe for losing money. The market is probably several years away from bottoming out. Even in Colorado. In Oregon, it hasn’t even begun to decline, by some measures. The peak of subprime ARM resets doesn’t come until February… the peak of option ARM resets doesn’t come until the year after.
The option ARM resets are the real middle class killer, I think..
I would not risk my money in this environment.
Just me.
Do the math and don’t be emotional about it – this is a business decision you’re making.
If it cash flows as a rental, or you’ll pay no more to buy it than you would to rent the same place, and it’s an appropriate place for you to be in (i.e., you can afford it, it’s appropriately sized, etc.), and you won’t need to sell soon, then do it, it makes sense.
If, on the other hand, you’ll be paying way more to own than to rent (and you’re probably underestimating the costs of owning anyway), this is not a good deal for you, esp. in a falling market. Don’t even think about it.
Thanks Yossarian and JimAtLaw,
It is emotional I hate moving so many times because I am trying to set some roots for my 3 year old.
I am also worried about renting longer because one of my co workers just got evicted when their rental was forclosed on. 1500 dollars to move in. A lost deposit for now anyway but you can’t squeeze blood from a turnip. Then 1500 to move again plus another deposit. All this in just 3 months and right at Christmas.
The only reason I considered it was a house I was looking at to rent has been reduced 30% and I thought about low balling that. Even at that owning is 20-30 percent higher. Not to mention further downside pricing risk.
Having listened to you guys though I know we have a ways to go. Like I said before Phoenix is at least 6 months ahead of us.
I would not buy in a boom market or a growth market, but in a stable market with decent rents, I would. In St. Petersburg, FL, I can pick up 3 bedroom, 1000 sq.ft. properties for 70-80k that need little renovation to be rented. Market rents are around 900, so depending on taxes and insurance, I can do no worse than break even. Get a fixed fully amortizing loan if you do buy anything!
Sequoia –
Of course there are other considerations to the home buying process than those just financial. However, just keep reminding yourself that the cost/benefit is that instead of buying right now and losing $50k, 100k, +, by waiting and using prudent metrics, you may get a bargain down the road. All the more money for your 3 year-old’s college fund!
What you really need to be watching for is the reversion to the mean of historical levels for median home price -> median household income and home price -> rent ratios. I believe Fortune recently published some data on this for markets all over the country (and Twist I believe blogged about it). You may want to search that out.
With so many negative factors right now (more and more resets as Yossarian mentioned), a leveling not expected until 2012, chaos in the financial markets that provide liquidity for mortgages, etc., things are going to get BAD. Make sure you’re on the right side of the fiasco.
As far as renting, since it’s so competitive right now for those owners needing to rent out their houses, you may have more leverage than you think. I would request records of mortgage payments and whatever other financial information (e.g., personal financial statements backed by supporting documents) you think would be useful from owners as a way to determine solvency in their houses. That would hopefully mitigate the surprise of getting kicked out because of foreclosure. If they have nothing to hide, and are smart investors that don’t want to pay on an empty house, they may comply.
Good luck!
One more thing to add that bears repeating over and over – just because a house has been reduced by a significant amount doesn’t mean a thing. If it was originally overpriced by 75%, and dropped 30%, is it a good deal? There is NO substitute for cold, hard data and the financial measures that should give you a good litmus test of whether a price is reasonable or not.
Our problem here isn’t so much overpriced as it is just too many McMansions. Most of the houses I am looking at are almost back to 2001 prices roughly 110 a sqft for semicuston granite stainless 3 car 3500-4000sqft homes. However they do have room to go lower because nobody can qualify to buy them. Most were bought by Californians and other specuvestors. The smaller homes are overpriced because you get an older outdated home in the same 100-110 range just smaller. I guess I am just being tempted by what seems to be a reasonable price after a few years of fantasy. Reality is price per sqft doesn’t help if you can’t afford that much sqft.
I really appreciate everyones comments and will check back again.
My main reasoning for purchasing a home was to build equity, get a little privacy, AND have a place to store all my crap somewhat semi-permanently. The more affordable the home is, the faster you should be able to build equity.
Then again.., I don’t know anyone who cares about equity anymore, and I’m not kidding about that.
Alanm –
Great suggestions for finding a home to rent. When we found a house last spring I didn’t go quite as far as requesting financial statments; but, I did look up the county records and found the house was bought before the bubble for a reasonable price and there weren’t any recorded liens on the house other than the orginal mortgage…
Village Idiot –
I would say that qualifies as great due diligence as well. I’m glad you added that.
Playing games with short sales is a bad, bad idea. You need all the stars to align for you to make a profit. Imagine things that can go wrong:
- Finding major issues with the home (which you now have to fix or declare upon sale)
- Getting over your head during repairs. Even worse, failing inspections because of it.
- Family/health issues that delay your timeline
- New foreclosures come online in the area.
- Entire RE market takes a sudden, downward plunge (due to recession, mortgage availability, etc.)
No thanks, I’d rather invest in mortgage-backed securities
Sandman-
No thanks, I’d rather invest in mortgage-backed securities
I read a Q and A in the business section of the Columbus Dispatch once. The question went something like:
Dear Financial Guy:
I’ve been buying lottery tickets every two weeks for the past two years- I guess I’ve spent about $10,000.
Although I’ve won a little on a couple of occasions, it isn’t very much. Should I stop buying tickets, or continue playing until I recoup my investment?
As you can imagine, the financial advisor had fun explaining the difference between buying lottery tickets and investing. If he were to have explained the difference between buying lottery tickets and MBS though, the nuances might have been too subtle for the lottery player to grasp!
[Igor's word: poverty]