Thursday, April 24, 2008

Observation on The Current Foreclosure Situation

Drudge, Kendall Harmon and others are linking to a lot of articles about how dire the current real estate situation is. The mainstream media is discussing how awful it is that people are losing their homes due to poor decisions made by them (adjustable rate mortgages, loans with balloon payments and such). I think it would be bad to lose my home. As with most people, I can empathize with someone who is about to lose their home.

However (you just knew that was coming), I have been dealing with a lot of houses that have been foreclosed upon recently. They represent a large portion of our current business. The vast (over 80%) of the houses that I've seen owned by lenders are not the prior owners residence. They were investment properties. Real estate, especially investment real estate, follows a distinct cycle in each market.

I do not know if we are in a recession. I suspect we may be. I do know that the current real estate situation is more of a correction to a prior bubble than an actual melt down. Real estate became over heated due to a false perception of security and access to easy credit by bad credit risks. All investments are subject to risk. Any tangible asset can vary in its value. This includes gold, by the way. The Japanese learned the hard way last real estate cycle that real estate prices can deflate rapidly (anyone want to buy a golf course?). Now the 'flip this house' crowd is learning it as well.

It is very much possible to make money on real estate in the manner shown on television. I know investors who have made fortunes buying foreclosure properties. I know investors who have also made fortunes flipping houses. In most cases, they are the same individuals. But these are folks who are willing and able to buy a house, work very hard rehabilitating it and then wait for it to sell. They are smart, hard working investors who stay on top of all the trends in the local real estate market. They also sink a great deal of their own money into these projects and so have considerable equity in them as well as the ability to wait.

What triggered my paying attention to this was that Sally and I saw a house that I had run the title on on a real estate flipping program. I recognized the address, but none of the names and facts matched what I remembered. I dug out my notes and discovered that what the program reported was completely bogus. The house was not owned by the person they identified as the owner. It was not purchased for the amount the program said. It did not sell at the time they said and for the amount they said. It therefore did not make the profit reported.

I know of exactly one person who bought a house without any experience in flipping that made money doing it. He also did not finance the purchase. He bought it outright. I am sure there are other people who have made money as amateurs in flips. I have never met them.

I'm formulating Matthew's law: "If you see a show on television about a way to make money in real estate, then the time for making money using that method has already passed." If the method were still valid, then the promoters would be using it to continue making the big bucks and not making television programs or infomercials.

One final note, the people who look sad and blue on television are not representative of the people who are in distress. Most of the people who have been burnt by the drying up of easy credit were legitimate investors. I do feel sorry for them. But some were the miscreants who made Atlanta number one in the nation in real estate fraud for several years running. For that lot, I have no sympathy.

1 comment:

Dr. Alice said...

I am reminded of Steve Martin's old joke about the book he wrote: "How I Turned a Million in Real Estate into Six Hundred Dollars in Cash."