To Invest or Not to Invest

We're feeling some uncertainty in the real estate market here tonight in West Central Florida.

This afternoon I visited a 1980s condo. It was a villa style unit, with about 1500 sf under air, a one car garage (3 bed bath), and looked almost liveable. It needed a new roof, maybe at total of $7,000 to $8,000 in direct expenses, plus I'd have to put in some sweat equity, painting, floors etc.

The asking price is $80,000, and I was told a lowball would not be a problem for the owner: Fannie Mae. They've had so many offers blow up because the buyers could not come up with the cash.

I spoke with the neighbor across the street in a similar unit. She told me she paid $170,000 for her condo unit two years ago.

The wife and I are hashing (hashing? man I wish she'd let me, but she wants me to be urine test clean, lest I need to find a job) it out over the price. We think a firm and final offer of $45,000 would be fair. Lehman will likely fail tonight, and the schmutz, as they say, is hitting the fan. The listing realtor does not think we're wasting our time.

That's the state of Florida real estate tonight.


  1. Wow, how long do you think fire sale real estate prices in major metropolitan areas will persist? This could rock for people who can buy.

  2. I think NYC is fittingly, about to have to accept a big fist and forearm, ouch.

    If an average American won the lottery tomorrow, where do you think he'd go? Hawaii, California, Florida, maybe New York City??? He isn't going to the rust belt. That's how I choose to play it.

    A realtor told me today that there were 25,000 listings in the Tampa Bay area MLS that were for short sales. He said this after I said I wasn't interest in short sales, only bank owned properties. The idea in the market is that these short sales will all translate to foreclosure, and that there's a lot more room to the downside.

    I've kept my powder dry, and I'm now willing to spend about a third of my free, liquid capital. I'd like to come out of this with six or seven income properties.

    With that said, I don't think there are going to be many losers made from buying into today's deep distress situations.

    I'm considering the creation of an investment fund for these types of properties in the Tampa Bay area, but I haven't gauged the interest yet. I know this market, we shall see.

  3. Not that I'm an expert on these matters, but I'd wait until after the election to buy any real-estate.

    Bailouts could become a huge bipartisan issue in 6 weeks.

  4. Anonymous5:06 AM

    Strange time to roll the dice, but then $45k does sound pretty reasonable.

    And if you want something out in Winter Springs, a place I used to own back in the day is on the auction block, only $1k to play:

  5. Woody:

    If you were planning on living in it, shop as though it were a washer, refrigerator, or other large consumer good, the investment concerns should be secondary (and distant). In case you weren't sure, the "urine test" remark tells me you aren't planning on living in it, even if you thought you were.

    If you're looking for an investment, My recommendation is to ignore price appreciation entirely and focus on carrying costs. If a conservative estimate of local rents ("conservative" here means figure on rents going down 10% or 20%) will cover the mortgage payments, maintenance, property management fees, insurance, utilities, neighborhood assn' assessments, taxes, and all other monthly expenses, plus an accumulating reserve for major maintenance (at some point, the HVAC will implode, or a pipe'll burst and flood it), then consider it. I'd also get a fixed interest mortgage to lock in one of your major expenses.

    When you're working out your spreadsheet, assume you'll use contractors for fixing everything that needs fixed. "Sweat equity" calculations are often just a way to not get paid at all (or even paid a negative rate) for a bunch of unpleasant work you're not any good at yet. Doing it Yourself will also lead to extended vacancy while you work on it every weekend (I speak from personal experience). When it's vacant you're carrying everything, and your investment total is creeping up with day that passes, and with every trip to the Home Depot.

    So be pessimistic, and ask yourself, how low would my offer have to be in order for me to feel really confident that I'm covered every month?

    For what it's worth, the classic sign of the bottom of the market hasn't occurred: Newsweek hasn't put "The Death of Real Estate Investing" on their cover yet. I think we have some downside left where deals will be found (particularly in the frothiest of the bubble areas).

    Finally, the above assumes a relatively free market in mortgage debt, landlording, etc. The recent F/F bailouts (plus whatever brilliant interventions are still forthcoming) will undoubtedly distort markets further. I won't attempt to predict what this means. If only there were an economist in the house...

    (OK, I should have said "an Austrian economist". Those other guys missed the tech and housing bubbles, and who can understand them anyway? Utils?? Oh please...)


  6. Thanks Jeff, I think your advice is reasonable, and your "style" is a good one that many people should follow.

    I'm not counting on capital gains right away, but I am using the sales comparison approach to value as a guide. I'm heavily armed with information and contacts in the business, as it's part of my livelihood. Most appraisers are dipshits, but I didn't get into the business for the money, I got into it to learn the market, and because I like to produce honest results. I was fired by a whole bunch of lenders during the bubble days. Anyhoo... interestingly, I'm also employing the cost approach as a litmus test. I'm in a market that was somewhat bubblelicious, but I'm in the most densley populated part of Florida, and there really hasn't been a lot of development or population growth over the past decade. We don't have high vacancy rates, and, as this area is closer to the beaches and other amenities, I expect demand to return early in the recovery. We can buy them below replacement cost, and there are opportunities to buy them at a significant discount the market.

    Why are they discounted to the market? The nature of finance. These properties need work, they might have a defect the makes them immediately uninhabitable for mortgage purposes. Banks and GSEs are not willing to mess around with financing contingencies on contracts. Most people don't have the downpayment necessary to get a conforming mortgage. Thus there are deals for cash buyers.
    I am a cash buyer. I don't need a realtor, mortgage broker, appraiser or home inspector. I can do all of these things.

    It's been a long time since a real income approach to value has worked. It's interesting that you talk about carrying costs, which are much more important than the variant on the sales comparison approach usually employed on the income statement. A realtor was asking me today about that cheapo condo that I mentioned above... he said something like... "why the f... do you want it if it has so many problems?" It actually could kick off some cash at the price I'm contemplating!!! I'm talking water damage (roof leaks), termites and sinkholes in the area, and it makes real financial sense! If a similar units were selling for $170,000 during the bubble, is not $40,000 cheap in the scheme of things? I've dropped my price a little. I was informed that there are no other bidders.

    I like to paint, and would not mind putting in new floors. Work that I can do while giving most of my attention to music is worth my while. This property is close enough to my home that I might not consider it as a rental. I could use the garage for my boat. Try adding a one car garage onto my primary residence for less than $30k! I could use the rest of the unit as a guest house and office. I could actually write off the whole damn thing as a business expense! There is another twist to this one, it is a duplex and I might be able to buy the other side for a similar lowball price. Imagine a 3,000sf house in a nice neighborhood for less than 100k. This one is interesting, but I'm working on several others. If you are a cash buyer, there are lots of interesting properties in this market.

  7. As I sit here writing up an offer this morning, I'm respecting the distress on Wall Street. The prices I'm willing to pay just keep dropping.

    If current liquidatin prices become the market, this is the end of financial life as we know it. This scenario has to be too negative. If the state wants to get inflation going, I think it will be successful.

  8. Did someone call for a doctor? Anyway you guys seem to have already hashed out the details far better than I could have. I definitely agree that if you could get it so that even zero price appreciation means you still make money, then it seems like a good idea--especially if this might be something you will expand on, so the experience itself is useful to you.

    (In contrast, I would hate being a landlord and I am the antithesis of Bob the Builder--"Can I fix it? No I can't!"--so buying rental properties is not something I would do, even if I had a bunch of cash.)

    I think if anything, the F&F seizure will create another mini-bubble in real estate. The government stands to actually make money if they can boost the stock price, right? (It has those warrants.) I think what these takeovers etc. mean is that the average standard of living will drop while housing and financial sectors are given CPR.

    So I expect housing prices to be more volatile going forward than if F&F bailout hadn't happened, but I don't think long-run appreciation should be hurt.

    Another long-term consideration: Both Obama and McCain will probably allow immigrants in to help run things when the economy further tanks and inflation goes through the roof. So that should support housing prices down the road.

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