How to Earn a 98.8% Return in One Year

Friday, October 24, 2008 | Ethan Roberts

The coffee stained, lightly creased listing sheet read: For Sale: 3/1, 1121 square feet, Asking $4,999.

I did a double take. Ethan, 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 is the house in Northeast Florida that is being sold for less than $5000:

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 backwards, doesn't it? The house back then was 560% higher and looked like a haunted shack! Today, after someone has done some nice remodeling, they are practically giving it away!

What goes on here?

Welcome to Real Estate foreclosure value meltdown 2008, 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 2003-2006, investors bought cheap, older homes, fixed them up, and flipped them over at much higher prices to lower-income residents who took sub-prime mortgages out to finance them. 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, and the prices are falling faster than the congressional approval rating!

Psst....Hey, buddy, got $5000 cash? Maybe another $3500 for fix-ups and minimal closing costs? It's yours.

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 trashing the home.

Let's do the math: 12 months x $700 rent = $8400 in a year's time. On your $8500 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.

Now let's look at the national market. Take a look at this next chart:

CITY	# OF HOMES FOR SALE	AT OR BELOW:
DAYTON, OH	340	$20,000
MINNEAPOLIS, MN	48	$20,000
BUFFALO, NY	153	$30,000
CHARLESTON, W.VA	20	$30,000
PHOENIX, AZ	27	$30,000
BUTTE, MT	10	$30,000

Get the picture?

Montana home with 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 or as second homes or as rental properties.

What happened in Florida and other areas is that between 2003-2006, investors bought cheap older homes, fixed them up, and flipped them at much higher prices to lower-income residents who financed them with sub-prime mortgages. You know the rest of that story. Now the banks can't get rid of them, and the prices are falling faster than the congressional approval rating!

Last week, CNBC reported that Coldwell Banker, one of the largest Real Estate franchises in the country, is now asking sellers to cut prices on Coldwell's listings by 10%! That means if your home is listed with them for $300,000, they are asking you to immediately cut the price to $270,000!

New style of Open House signs for real estate listings

Tycoon readers, we are now entering the time of year when real estate sales typically begin to fall off. Over the next 4-5 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 sub-prime loans as higher unemployment numbers begin to put a strain on borrowers who previously have had no trouble paying their loans off.

2008: 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. Those folks who have cash on the sidelines and good credit, will be able to scoop up the bargains at 25 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 which allowed them to buy when there was blood in the streets (for those who are squeamish, you may want to skip the next picture).

Time to go shopping?

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. As I did in my article of a few months ago, when I buy the next investment property, I will have all the details for you of the process I followed and how it turned out.

They are giving away houses! You don't want to miss this.

See you next week!

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Ethan Roberts
Chief Investment Officer
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