The Best Real Estate Investment Nobody Knows About! - Part 8 by Mark & Lloyd Walters 9-1
“MARKET'S GO UP & MARKETS GO DOWN”
Markets change. In a sellers market there may be lots of buyers willing to
purchase the property. Low interest rates help to make it a sellers market because more
people can qualify for financing so the seller has many potential buyers for their
property. We've experienced plenty of this when the interest rates were so low. In that
instance, the unmotivated seller doesn’t need to deal with someone who’s trying to get
a deal from them. You know the hot markets. Big businesses may be moving into your
area and the housing market is booming.
Markets don’t always stay hot. Interest rates can climb and all of a sudden there
aren’t that many buyers out there anymore. When this occurs, there are more houses on
the market than buyers. Buyers then become a golden commodity, especially if the
seller is motivated for reasons like the ones mentioned before.
When you’re looking for existing housing, try to find out how long the property
has been on the market. If it’s been a while, the seller may be more willing to listen to
your offer. Also, try to find out how much equity the seller has in the property. If there
is very little equity, the seller simply has no room to negotiate. If they have $20,000 or
more in equity, they may then become a bit more flexible. Granted, properties that
aren’t very old have less of a chance to have a lot of equity built up compared to older
homes, but you will find some. These are homes that people put large down payments
on. In many cases people are thinking they will get that equity out when they sell and
put it towards their next house. That’s simple enough. But, even these people run into
challenges in their life that may force them to give some of that equity up. You’ll never
know until you start looking for clues and answers. Ask questions as to why they're
selling. You may be surprised with what you find out.
“RED HOT BURNIN’ MARKETS”
On the next page you will see a story about the housing market in Phoenix
Arizona in the fall of 1999. I’m showing you this to bring something to your attention.
Markets do indeed change and some defy all odds. Sorry about the vertical display,
but you just need to glance at the headlines to get the gist of the story.
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“LET ME TAKE YOU BACK IN TIME”
I first came to Phoenix in 1990. I was visiting from my home in the San
Francisco bay area. Believe me, living in the bay area, I knew about boom real estate
markets. In California in the later 80’s, residential real estate was going up as much as
30% a year. People were spoiled. They expected those kinds of increases. When those
kinds of things happen, get ready for the blow off. It did indeed come and were people
panicky! Why? They were making incredible amounts of money doing nothing. They
owned a house and their equity just kept on growing and growing without them doing
a thing. It was quite incredible. What these people did was refinance to the hilt. They
took out their equity and spent it on cars and trips and everything else. Then the market
changed on them and their properties were worth thousands less. People owed more
than their homes were worth. Foreclosure rates shot up! It was an education for me that
I’m passing on to you. Markets change. Back to my trip to Phoenix.
In 1990, there was a tremendous thing happening throughout the country.
Maybe you heard about it. It was the savings and loan debacle. Simply put, lenders
were making loans to people that were not well qualified. Besides that, they were
making commercial loans on property that was very risky. The loans started to go bad
ending up with thousands of properties being foreclosed upon by borrowers. The
nation had a serious problem. The problem was, the government backed many of these
loans. Loans like the ones discussed earlier. This is one of the reasons why good
people like you and me are forced to pay PMI payments. It’s because of all the people
who came before us who were irresponsible and didn’t hold up their end of the
agreement with lenders.
Anyway, Phoenix was one of the areas hit the hardest by this. Values on
properties plummeted. When this happened, people owed more on their house than it
was worth.
In this kind of a situation, people often walk away from the property. These
people probably came up with very little down payment money when they purchased
the property so they figure they didn’t have much to lose. You wouldn’t have believed
it. Driving down the street one noticed the over whelming amount of homes with
government signs in the front yard. These were “for sale” signs for all the houses the
government ended up taking back when the borrowers stopped making payments on
their mortgage.
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There were real estate agents with folding tables on street corners handing out
lists of all the government owned homes for sale. Coming from the bay area, I couldn’t
believe the contrast. Sadly, it was the American public that bailed out the saving and
loans. So it was your tax dollars that went to fix this problem back then.
Why would one leave a booming area to go to an area that was so depressed
you’re wondering? The answer is simple. When there’s blood in the streets that means
there’s opportunity. I flew into Phoenix in 1990 armed with a map that I had made
showing me all the homes for rent and for sale. I had been getting Sunday editions of
the Arizona Republic business newspaper for a while monitoring the real estate
situation. Then I jotted down all the properties that had addresses and made a map
showing me in order the most efficient path from one to another. It was highly
informative. I saw houses for sale from $40,000 and up. There were decent looking
apartment buildings that were completely vacant and abandoned. To give you an idea
of the magnitude of this situation, new home development companies were throwing
up their hands in the middle of construction and filing for bankruptcy. They were
literally walking away themselves. Larger companies with foresight were coming in
and purchasing these partially completed housing tracts for pennies on the dollar. They
had reserve capital and felt they could weather the storm until the market changed.
This was a gutsy move. At that time no one knew how long that might be and what
kind of market would finally prevail.
The rental market was a mess. There was an over supply of houses for rent.
There was a glut to say the least. I spent a weekend there just soaking up the situation
and having a little fun. I followed the Phoenix market from California for another 2
years through the Arizona Republic business newspaper. Slowly but surely things
began to change. It was still depressed, but the bottom had hit. The newspaper began
reporting stories that state governmental programs were being designed to attract
business from other states. They were giving tax breaks to large businesses if they
would move their operation. The state was aggressive in promoting these efforts.
Business from neighboring states began to migrate to Arizona.
Phoenix ultimately was the beneficiary of these efforts. Analysts began
projecting future growth for Phoenix. It appeared that the pulse of the area was
beginning to strengthen.
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In 1992, I went back to Phoenix to see how the area had changed over 2 years.
There were still signs of the slump. Things like this don’t change over night. But,
compared to what it was like on my last visit, one could feel the life beginning to come
back. What were the clues? I looked in the paper to see how many homes were for sale
and for rent. There were still a lot, but not as many. That implied the level of demand
on housing was beginning to increase.
Plus, I knew the history of prices. It appeared rents had stabilized and were
showing a little strength.
Remember the vacant apartments? They had since been purchased and
remodeled by investment companies who believed the future was bright. Large real
estate firms spend loads of money analyzing areas before they commit to doing
anything. If you see new buildings popping up, you begin to realize change is taking
place before your eyes.
I also went to the grocery store and found the free real estate magazines that list
homes for sale and rent. More new housing was beginning to be constructed. Then I
checked the magazine for apartment rentals. You can often find out a lot from these
kinds of listings. If you are trying to rent a house, check the apartment market to see
what people’s choices are. You will quickly begin to determine what the bottom price
range is in an area by seeing what apartments are charging. Rent for houses in the same
area will of course be higher. I quickly noticed that new apartments were being built.
Prices were affordable, yet high enough to show some demand.
The reason why so much building was going on was that business was
beginning to move to Phoenix and people were following to go where the jobs were. It
was the start of demand coming back to Arizona housing. From 1992 through the end
of the decade and beyond, Phoenix has had a real estate boom. The programs designed
to attract business worked incredibly well. Numerous companies moved from
California to get away from the over taxing of businesses. The reduction of such costs
and governmental red tape meant more money to the bottom line. Along with the
expansion of business and employees came the need for more housing.
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Not only did the glut of available residential and commercial properties dry up,
more were needed to satisfy the new demand. People were moving in from all over the
country and continue as this is being written. 30,000+ new housing permits in a
metropolitan area year after year is a lot of building.
There's a reason why I'm going into such detail about this experience. Look
around where you live. Is there growth taking place? Does it seem to be robust?
Consider the growth path and see if there are any opportunities. Are there signs of
growth in a particular direction? Can you find housing a little bit beyond where growth
is currently? This is not to say the only reason to purchase a property is in the hopes of
future growth reaching it. Investing in a property must make sense regardless of the
direction of growth. You need to make your profit going in. The rest is gravy.
If there's no boom in your immediate area, is there one in a neighboring area?
Since you're interested in new housing and your maintenance requirements should be
very low, you may consider a city or area in a neighboring state that's experiencing a
boom. If the numbers work, you could consider having a property management
company in that city take care of the landlording responsibilities. You might consider
this investment for the shorter term. If you have done your research for that area and
noticed values increasing steadily due to the boom, you may hold onto the property for
a few years with the expectation of an increase in value. This can be a little dangerous
if you're depending solely on appreciation to make this deal attractive to you.
Often times, when a particular area is experiencing such a boom, its market can
act much differently than the nations market as a whole. The nation could be
experiencing a slow down or no growth whatsoever, while the boom area has home
values climbing. Be sure to weigh it all out before you make a commitment. It is worth
at least considering though.
"WHAT’S THE APPRAISAL VALUE OF NEW HOUSE?"
I purchased a new home and found out that the FHA appraisal was $15,000
higher than the amount being asked by the builder. The builder of these homes had
different developments through out town with varying price ranges. This happened to
be the development on the outskirts of town and the least expensive of all their
developments. They were selling like hot cakes.
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The builder just happened to be asking less for the house than the FHA was
appraising them for. I don't know why the builder would do this. I can only figure it
had to do with competition with other developments. This added value will only be
realized when all the homes are sold and the original purchasers begin reselling them.
At that time fair market value will be established.
Just the same, if they are appraising for so much more than they are selling for,
that will still affect your value as far as PMI is concerned. It should take less time to
establish 20% equity in this property considering the higher appraisal. Also realize, the
FHA establishes values from a very conservative viewpoint. They don't want to give a
property an inflated value because they make loans based on the value given by an
appraisal. An overstated value can lead to trouble as far as lending too much money on
a particular property. Be sure to ask the builder's agent in the model home what the
FHA is appraising the homes for. You might discover something.
Knowing what you now know, I recognized the value compared to other new
and resale homes currently on the market. There's no "stealing in slow motion", so
when you find a value like this, act fast if you're serious. After I purchased this house it
took 6 months to build. Over this time period the builder raised the price twice as more
homes were sold. So, before I ever took possession of this house I had gained equity
not to mention the already high FHA appraisal.
To finish this chapter I'm including something fun. It's an ad that I had to show
you. This came from a census book done for Phoenix and its surrounding cities back in
1957. Notice the $10,000 price range. Those houses are now worth 15-25 times that
amount depending on where you bought them. It's fun to look back and wonder
"What if". It emphases why single family homes are such great investments.
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8
"Internet Sites That Will Help You"
"Surf's Up!"
On the following pages you will find Internet sites that are very helpful and as
this is being written, free. If you have online access, there are sites that can help you
get access to information once only available to licensed professionals not long ago.
As with everything online, web sites change their look and services. If and when
that happens with the following sites, just search the web trying to find other
companies offering the same things.
The first site is www.homepricecheck.com
This site is very self-explanatory. Explore what it has to offer and put it in your bag of tools. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
