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Wednesday, September 20, 2006

Market Flushes Out The Not-So-Serious

Yesterday afternoon, I had a guy over to give me an estimate on cleaning my carpets. He was the owner of the carpet cleaning company and we got to talking and it turns out he used to invest in real estate. When I told him I had sold my rental a while ago, he said "So you got out while you could, huh?", referring to the recent market slowdown. Well, no, I got out because it made sense to me at the time.

He went on to tell me that he had 9 houses at one point. He was flipping properties using 100% financing (bank loans, not hard money). He's got one property left that he's got rented on a lease option, He owes $750,000 and said it just appraised for $725,000. That's not good - especially if his lease option contract states the sales price will be the appraised value (which I have seen a lot of contracts specify).

I didn't bother to tell him that I was still working real estate. It was obvious to me that he was one of the ones who made a quick buck in the real estate boom and was now leaving the party as things slow down. His strategy seemed to be "buy and pray for appreciation." During the boom, this worked, but nowadays, it won't.

All in all, I'm glad to see people like him leaving the real estate investment arena. It's less competition for me and it will help the market return to "normal" valuations. This is apparently happening across the state, as I got a call yesterday from my Realtor informing me that her husband (who is part owner of buyazforeclosures.com, a company that buys and sells foreclosures) is getting back into the property wholesaling business because spreads, the difference between what a house can be bought for and what it is worth, are getting bigger now.

3 comments:

Anonymous said...

Shaun,

Question for you. I found a bank owned property in my area that can very well net me 30K once all the dust clears. Here's the downfall of the property. The bank has put a 3 month deed hold on it and they are mandating 10% down on ernest money which equates to $7500. Is this something new? Why would they mandate such a high price for ernest money? My realtor says the 3 month deed hold is becoming common because of fraud within the flipping trade. But as for the ernest money she states typically if a house is under 150K 1K should be sufficient for an ernest payment. What are your thoughts. Is this the norm on bank owned REO properties?

Billy

Shaun said...

I've never bought a bank owned property before, I so can't answer your question based on any experience. I do know that there were people who tried to defraud banks by flipping properties and artifically increasing the market value (by increasing the price with each flip - which would typically be bought by their partner in crime). I agree that 10% down on a $75,000 house is a bit much. All things are open to negotiation. Ask the bank if they will accept $3K down with the 3 month hold. Show them some numbers that show how much your holding costs will be for the three months. Tell them that justifies a lower earnest money. Make the numbers for your holding cost plus the $3K (or whatever amount you decide) be close to their $7,500 earnest money requirement. In other words, show them you will have that much in the property even with the lower deposit. FYI, I've never flipped a house in less than 3 months, so I don't think their 3 month deed hold is an issue.

RE smartie said...

In '82 I bought a 20K house and put down $1000 in earnest money.

It looks like the banks may be going back to 5% earnest money?

After all the fraud and nonsense that's been happening in the RE market the past several years, it would not be surprising for banks to go back to 5% earnest.

1K earnest on a 150K property sounds laughable under normal circumstances.

With all due respect, it sounds like your realtor does not have a clue.

The Senate has been looking in to the RE mess of the past several years and banks are starting to realize that they made HUGE mistakes with the lax lending standards.

Sounds like things may be going back to "normal".

Next step: 20% downpayments.

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