How to Earn a 98.8% Return in One Year
Friday, October 23, 2009 | Ethan RobertsRating:
Editor's note: Thanks to everyone who participated in Ethan Roberts' survey about real estate investing -- you've given us some very valuable information! There's still time to share your feedback and questions. Click here to take this quick online survey.
How to Earn a 98.8% Return in One Year
The coffee-stained, lightly creased listing sheet read:
For Sale: 1,121 square feet -- Asking $4,999
I did a double-take.
"Ethan," I thought, "you really should see an eye doctor. Surely the price must really be $49,999? Or did I wipe out one of the digits with my carelessly placed coffee mug?"
I rubbed my eyes and checked it again. The $4,999 price was correct. No glasses for me. This was the house in Northeast Florida that was being sold for less than $5,000:
That's incredible, don't you think?
Now I want to show you another picture of the same house, taken in early 2006, when the asking price was $33,000:
Seems backward, doesn't it?
The house back then was priced 560% higher but looked like a haunted shack!
Today, after someone has done some nice remodeling, they are practically giving it away!
What's going on here?
Real Estate Meltdown Madness
Welcome to the real estate foreclosure value meltdown, where thousands and thousands of bank foreclosures languish on the market -- because financing is much harder to acquire, and those who can still get financed are too afraid to act!
What happened in Florida and other areas is that, between 2003 and 2006, investors bought cheap, older homes; fixed them up; and flipped them over at much-higher prices to lower-income residents who financed them with subprime mortgages.
A quid pro quo for both buyer and seller!
Well, you know the rest of that story. Now the banks can't get rid of them (a huge reason for the many bank failures we've seen this year), and the prices are falling faster than the congressional approval rating!
Psst ... hey, buddy, got $5,000 cash? Maybe another $3,500 for fix-ups and minimal closing costs? It's yours!
Home Sweet $5,000 Home
Now let me tell you a little secret about that house above. Sure, it's not in the greatest neighborhood, but it will rent for about $700 a month. And if you sign up with HUD's Section 8 program, most of the rent money is guaranteed.
Section 8, for those who aren't familiar with it, is the common term for the Housing Choice Voucher Program, a federal assistance program that is provided by the U.S. Department of Housing and Urban Development (HUD).
Speaking of HUD, here was the greatest HUD of all.
Rest in peace, Paul Newman...
Although some tenants don't pay their share, most in fact will pay their small portion of the rent, so as not to be kicked off the Section 8 program.
There is a long waiting list, so people do live in fear of losing their eligibility for not paying rent or for trashing the home.
What if You Owned That Home?
Let's do the math: 12 months x $700 rent = $8,400 in a year's time. On your $8,500 total cost, that's a 98.8% return, minus your taxes (nominal on that house), insurance, repairs and occasional vacancies.
However, what if -- like a lot of people -- you don't want to deal with Section 8 tenants? Then you simply hire a property management company, pay them 12% of the $700 ($84) each month, and reduce your annual return to ONLY 86.9% before expenses.
Only 86.9%...
Folks, they are now giving away houses for next to nothing!
Where I live, in a large city of Northeast Florida, there are currently 111 homes for sale for $20,000 OR LESS!
Again, that's not a typo. And lest you think this is just a quirk that's going on in Florida, here's a beautiful newer home in Arizona -- a foreclosure with an asking price of only $50,000!
There is a long waiting list, so people do live in fear of losing their eligibility for not paying rent or for trashing the home.
What if You Owned That Home?
Let's do the math: 12 months x $700 rent = $8,400 in a year's time. On your $8,500 total cost, that's a 98.8% return, minus your taxes (nominal on that house), insurance, repairs and occasional vacancies.
However, what if -- like a lot of people -- you don't want to deal with Section 8 tenants? Then you simply hire a property management company, pay them 12% of the $700 ($84) each month, and reduce your annual return to ONLY 86.9% before expenses.
Only 86.9%...
Folks, they are now giving away houses for next to nothing!
Where I live, in a large city of Northeast Florida, there are currently 111 homes for sale for $20,000 OR LESS!
Again, that's not a typo. And lest you think this is just a quirk that's going on in Florida, here's a beautiful newer home in Arizona -- a foreclosure with an asking price of only $50,000!
This home sold for nearly $200,000 when new.
Montana home with an asking price of $19,500
All over the country, an inventory of unsold foreclosures are being given away for next to nothing. You can buy them as starter homes for your children, as second homes or as rental properties.
Bring on the Buyers
Last year at this time, Coldwell Banker, one of the largest real estate franchises in the country, asked sellers to cut prices on Coldwell's listings by 10%. It was a 10-day sales event designed to bring buyers off the sidelines in an effort to stimulate the housing market.
In other words, if your home was listed with them for $300,000, they asked you to immediately cut the price to $270,000!
New style of Open House signs for real estate listings
According to the company's Web site, more than 33,000 people participated, approximately 6% of whom sold their homes during (or shortly after) the event, and 70% of participants left their homes on the market at the lower prices.
While this initiative didn't "save the day," it will be interesting to see whether other creative approaches such as this surface.
'Closing' in on Real Estate's Future
Tycoon readers, we are now entering the time of year when real estate sales typically begin to fall off. During the next four to five months, I predict that we will see the following:
1) Banks slashing the heck out of foreclosure prices to clear out the bloated inventory.
2) Sellers who have thus far resisted cutting prices (and who have the equity to be able to do so) will begin to acquiesce -- especially if other realtors, following Coldwell Banker's lead, begin to pressure them.
3) A new wave of lis pendens (initial notice of pending foreclosure) and actual foreclosures will develop among non-subprime loans as higher unemployment numbers begin to put a strain on borrowers who previously have had no trouble paying off their loans.
2009: A lean year for trick or treaters...
The end result? Deflationary-era bargains in many homes, the likes of which we haven't seen in years and years.
Unfortunately, many will suffer from the declines, including an enormous generation of Baby Boomers who were depending on selling their expensive homes to generate enough income for retirement.
Foreclosure and other distress sales will work to reduce the values of homes in thousands of middle-class neighborhoods. Let's face it, there are going to be a lot of people working longer than they ever expected.
But a few people will prosper.
Find Treats in this Tricky Market
Those folks who have cash on the sidelines and good credit, will be able to scoop up the bargains at 25 cents or 50 cents on the dollar. Those who are investing in long-term rentals, or even just buying primary residences, will reap the rewards later on for the fiscal discipline that allowed them to buy when there was blood in the streets.
Unfortunately, many will suffer from the declines, including an enormous generation of Baby Boomers who were depending on selling their expensive homes to generate enough income for retirement.
Foreclosure and other distress sales will work to reduce the values of homes in thousands of middle-class neighborhoods. Let's face it, there are going to be a lot of people working longer than they ever expected.
But a few people will prosper.
Find Treats in this Tricky Market
Those folks who have cash on the sidelines and good credit, will be able to scoop up the bargains at 25 cents or 50 cents on the dollar. Those who are investing in long-term rentals, or even just buying primary residences, will reap the rewards later on for the fiscal discipline that allowed them to buy when there was blood in the streets.
As we draw closer to the holidays, I will have more to report on this topic. I am now collecting data on homes in different areas, and getting ready to make another purchase within the next month. After all, people are practically giving away their homes!
See you next week!
(Please let us know what you think about Ethan Roberts's article.)
Rate his article here »
Rate his article here »
Ethan Roberts
Contributing Editor
The Tycoon Report
