patrick.net

Whoa... somebody just punched the "Sell" button on Wallstreet!

Transplant,

I don't understand why your dad doesn't just drop the price to 600k. If it cost him 300k to build, it's still a great return. If it cost him MORE than that, and he's got principal tied up in it, and not just debt, that might affect his selling price.

@Boston Transplant,

If your dad can rent out the place for mortgage carrying costs, then he already has a significant advantage over most other recent "accidental landlords", so I can see why he is in no hurry to cut his asking price. However, if he has $ several hundred grand sunk into the place, he might also want to consider opportunity costs vs. alternative use ROI for that money. Since he is an experienced LL, it's probably safe to assume he is familiar with calculating cap rates, so you could mention that to him. If he plugs in his numbers and gets a cap rate at or above conservative investments (T-Bill or CDs pay out ~5%), then he's probably ok renting it out. If it comes in well below, he might be better off selling now.

Boston Transplant,

I think he should sit down with an accountant and some spreadsheets and crunch numbers. Make different assumptions about housing price down the road and see how it comes out in each scenario. You have to put in a continuum of varying worst cases and see what you risk tolerance is for that.

From previous analyses I have seen, in a declining housing market, it would not be best to hang onto a white elephant. Sell it, get out, put your money to work somewhere where it grows. I have seen plenty of houses wrecked by tenants is another danger. Being upside down, rent less than carrying costs, and the opportunity costs of not putting money to work where it will grow make this a losing proposition most times. But you won't KNOW until you seriously analyze it instead of go with your gut and some back of the envelope calculations.

I bought some Cisco in 1999. I held onto it stubbornly for a LONG time before I sold it for a capitol loss. If I had been smarter I would have sold it when it dropped by 20% and put that money into something else instead of continuing to watch it shrink. Like most people I had to learn the hard way about opportunity cost and the effect of inflation.

"Whoa… somebody just punched the “Sell” button on Wallstreet! "

I heard on the radio this morning that sales data on existing homes is due out today. Wonder if that had anything to do with it.

Boston transplant,

Forgot to mention it doesn't matter so much how many years to a recovery, it's how deep it will be. In many areas prices will have to correct by as much as 50% drop to reach that. If you assume a return to norms, prices will actually dip below median historical values for a while. Is he willing to withstand that? Or do I smell a "soft landing" assumption here, where everyone working at WalMart can find a way to pay their mortgage on a McMansion?

Eliza says:
"When Walmart employees are making $100K a year, our government’s debts will seem trivial."

Vincente says:
"Or do I smell a “soft landing” assumption here, where everyone working at WalMart can find a way to pay their mortgage on a McMansion? "

Inflation, the road to a soft landing? I hope not.

Peter Schiff has been arguing this for years. He suggests investing in utility companies around the world in dividend paying stocks in their own currencies. Unfortunately, every country is printing money, only not as bad as the US.

www.europac.net

Lereah-lite is starting to show signs that he has been learning from his former master:

“‘The market is underperforming when you consider positive fundamentals such as the strength in job creation, economic growth, favorable mortgage interest rates and flat home prices,’ said Lawrence Yun, the Realtors’ senior economist, in the report. ‘It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market.’”

In other words, the problem isn't that housing prices are totally out of whack relative to fundamental economic considerations. The problem is that the prices "flattened out" and lack of "signs of stability". As you can see, the mantra still is that prices can only go UP, and the P/E (price./rent equivalent) does not matter. Larry-boy, you would have made David Lereah proud.

sfbubblebuyer,

$300k is the debt outstanding on the place, including the mortgage on the lot and other debt for building materials, etc. But his cost basis is considerably more than $300k; he had to pay his guys to build it, not to mention his foregone salary. Basically he invested previous years profits from the business into the house. But I don't know at what point exactly he would make a profit or lose money. I suspect by selling $600k he would be losing money.

HARM,

Your point about opportunity costs and ROI is basically what I'm getting at. My suspicion is that the cap rate taking into account his sunk costs would be very low, so I will mention that to him.

Vicente,

The idea of running the numbers carefully is a good one (obviously). As a builder, he is good at procuring materials on the cheap, managing his guys, finishing on schedule, even managing tenants. But he's not good at the numerical analysis, so getting an accountant would make sense.

Bottom line, while he stands to lose some money, at least he's not on the verge of bankruptcy, which some of his peers in the area are. He knows of several multi-home projects sitting idle, presumably burning cash. I'm just glad he didn't leverage himself more than he did.

Okay, if he's got capital locked up in there, and can rent without losing money, but doesn't think he can sell and at least break even, it becomes a pretty tricky calculation.

Many people would rather lose money to inflation and opportunity costs over a few years than to pull the trigger and take a small loss nominal loss now.

If he's 620k into the place, sells for 600k, he's eating a 20k loss.

If he rents it (breaking even) for 10 years, sells it for 700k, he's making 80k in 10 years off of a 300k investment (assuming he pays interest only on the mortgage.) That's a 2.1% return on investment. Assuming inflation of 3%, he's losing money to the tune of almost 1% a year.

Of course, that's a very simplified version of it. If he can rent to cover costs now, one would assume he'd be renting to make at least a little profit in 10 years. And if he's doing more than just paying interest, he'll be getting back more than 400k from his original 300k investment, as he'll have bought down the principle.

If he can rent it in a cashflow POSITIVE way, where it's making enough to cover PITI + repairs if it were rented 11 months out of 12 (To deal with changing tenents) and can stomach the thought of watching the value drop before it climbs again (I.E. wants to be a landlord for 10 years there), he's in a good position to hold the property. Otherwise, I think he just needs to do enough of the accounting to realize that a small loss now is not horrible as he can get much better returns with his money elsewhere, offsetting the loss much more quickly than renting it long enough to sell for a good profit or to make enough money on rents that it's a good investment.

BT,
Median family income in Medocino County is $42,042 according to HomeGain. That stat alone should help light a fire under your dad to get that property out of his hands.

I really like the way this AP economics writer keeps referring to NAR as "the Realtors", like it is some kind of crime syndicate. BTW, everybody, you can relax, the main issue with the market is household formation, not, you know, affordability.
Lawrence Yun, senior economist for the Realtors, noted that household formation had slowed. He said that implied many people had decided to put off buying a home and were doubling-up in rental units or moving back home with parents.

"It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market," he said. "The lack of buyers' confidence is a major factor in the lower sales."

sfbubblebuyer,

Thank you, those numbers make sense and I think I can use them as a general conversation starter with my dad. He is thinking of rolling the mortgage from an interest only on the built property, onto a refi on his primary residence, using a fixed-rate. People on this board talk a lot about the pitfalls of the refi, so I'm just a bit concerned with this aspect of his plan.

EBGuy,

Thanks for the numbers. I'm aware of the low average income in Mendocinco County, having grown up there (though I suspect earnings from, ahem, medical marijuana, are under-reported). My dad envisions someone retiring from the bay area buying the place. I don't know how much of that is fantasy or not. I do wish he had stuck with the lower priced homes more suited to the area though.

What particularly recommends Mendocino as a retirement location?

I think the only reason prices got so out of whack outside immediate Bay area, was crazy pricing that forced people to look further out. Now that demand has collapsed. I mean seriously, look at all the communities in the Central Valley whose prices and development shot up in the last 5 years. Not that many people really want to live on my side of the mountains beyond Napa, they were forced into it.

When it comes to finance, go with the numbers not your gut. Beats some fantasy about a white knight or a lottery ticket.

Neighbor on my street where I rent in LA just gave up on selling also, and is rentin' her out.

Last 3 homes listed in 6 months on my street failed to sell. Two are flop lords, one was simply a fishing seller who still lives there.

I would expect rents to go down if this is a major trend.

Maybe I shouldn't have said "accountant". What I meant was someone competent to run the numbers for you. Could be you with a little study. Should not be anyone in any way connected with banks, mortgage brokers, RealtWhores, etc. Inevitable if they've got something to sell, they will consciously or not distort the numbers.

Heck even my tax accountant at H&R block keeps trying to work me for a home purchase while we're going over 1040 paperwork. They also do mortgage biz so even the best numbers guy will be corrupted by the sales-man pressures of their firm.

I don't know what the best source of impartial analysis would be, perhaps someone here has an idea?

Just when I thought I had already heard it all, seen it all, or read it all, yet another fresh outrage from the REIC fraudsters comes my way:

http://www.ushomeauction.com/terms.php

3. BIDDING AND BUYING AT THE AUCTION

Reserve Price. All Properties have a Reserve Price, meaning the Seller of each Property has established an unpublished, minimum selling price. The starting bid is not the Reserve Price. In order to become the Winning Bidder for a Property, a Bidder must meet or exceed the Reserve Price and have the highest bid. The Auctioneer may open bidding on any Property by placing a bid on behalf of the Seller. The Auctioneer may further bid on behalf of the Seller, up to the amount of the Reserve Price, by placing successive or consecutive bids for a Property, or by placing bids in response to other bidders. If no bidders meet the Reserve Price, the Seller is under no obligation to sell the Property. The Seller may withdraw a Property at any time prior to the announcement of the completion of the sale by the Auctioneer. Auctioneer is not acting as an agent for any Bidder in any capacity, and is acting exclusively as the Seller’s agent.

Unf--king-believeable. Having a secret (oops-- "unpublished") reserve price was already bad enough. Now the fine print informs us that shill bidding is not only commonplace (which the non-clueless already knew), it's apparently *also* perfectly legal??

If that's true, why even bother with the pretense of a so-called "auction"? How about just randomly picking "winners" from the phone book and mailing them a "congratulations, new homeowner!" notice (along with their six-figure bill)? I haven't checked my mailbox today ---who knows, maybe I already "won" a half-million dollar condo in Modesto!

God bless our beloved state "regulators" once again, for proving that government doesn't work (by example).

Sounds like somebody is having a case of the Mondays

@X,

:lol: We still on for that July 7th blog party?

President HARM

Now, I am become Debt.

Yes we are Sir.

President HARM

Now, I am become Debt, the destroyer of wallets.

Yes we are Sir.

Thanks, surfer-x. Always wondered what 'DOW' stood for...

Time for the Wall Street Shuffle via 10cc in the 70's!

In case you forgot the words-

http://tinyurl.com/286s4q

Seeing as this thread is the most dog slow conversation in months, I have a completely irrelevant question. Several of you appear to have lived abroad in what one would impolitely term "third world countries". DinOR and the Philipines comes to mind.

Right now I am seeing ads for golf course and beachfront property in Morocco and other areas for $30,000 and up. Picking up a golf course studio apartment near the beach for $30K seems like an excellent deal. All sorts of thoughts come to mind. Is it cheap enough that I could maintain $150K in investments and somehow live off the interest (or if not, what level of capital would I need)? How does one determine if a foreign country is safe for Westerners? How does one manage the different currencies, the tax situation, etc.? What secondary factors does one typically consider, such as access to hospitals, health insurance, local diseases, religious conflicts, expatriate colonies, etc.?

I am no expert, but you would first want to make sure that there will be no serious problem with your holding property in Morocco. This comes to mind because I know that Mexico and several Pacific nations do not allow foreigners to own real estate, or do not allow foreigners to hold certain real estate (for Mexico, I believe you cannot own along the coast unless you are Mexican, and becoming Mexican is apparently difficult). Morocco is pretty far from Mexico, but there might be some similar issues there. There are ways around those problems--you find a local agent or agency that you trust to hold the property for you. You know, a local agent that you would trust with a large chunk of what you own.

I have also heard that Morocco is an uncomfortable place to be Jewish. I don't know about other religious/cultural groupings, and it might be different in an expat colony.

The sites that I've been looking at seem to cater to British retirees who are trying to stretch their savings. One such example is www.compasspropertiesabroad.com.

Brand,

There is a site (Real Posts) which contains commentary from US State Dept personnel who have been posted to scores of locations around the globe. It's in the form of a questionnaire, and many have multiple entries up listed newest to oldest.

While it's hardly an exhaustive source, you might find it interesting to flesh out your ideas about Morocco.

http://www.talesmag.com/sitemap.shtml

My last visit to Africa was to Addis and Tangier, so not very useful to you.

I would certainly not buy a property in a place site unseen. It is a good excuse for a vacation to an interesting foreign locale, if nothing else.

I can't believe everyone isn't talking about the Bear Stern hedge fund blow-up. This might the real deal, the big shock to the financial system that so many here have been hoping for. Probably not, but I notice that *all* the financial stocks are taking a beating right now.

Jimbo: You need to meander over to Calculated Risk. They have scores of in-depth analysis of the Bear Stearn blowup, including links to some excellent resources. I think a lot of us have gotten our BS fix over there. ;)

Bruce: According to those maps, Tangier is within an hour of many new developments. Please add commentary. :)

Can you be more explicit about "financial stocks are taking a beating"?

Why would Bear Stearn be the straw that broke the camel's back particularly? Perhaps like some other recent implosions it's a symptom or a victim not a trigger event.

Perhaps now that it's down "there's never been a better time to buy" a CDO eh?

In keeping with the start of this, you would think a "hedge fund" would be something you would want as a safety net? It seems now that the meaning of hedge fund is something entirely different? I are an engineer not a financial analyst, sometimes the terms they toss around confuse me.

What can a saver do to protect his purchasing power, and maybe make some investment income?

emu farms. invest everything in emu farms and reap the rewards!

Different Sean Says:
emu farms. invest everything in emu farms and reap the rewards!

It is a good time to buy or sell an emu. Also don't forget to buy my book, "Rich emu, Poor emu".

SP

Brand,

I've never found any single, comprehensive source for the things a would-be expat usually wants to know. As I'm not looking to the North of Africa as a possible residence, I failed to note many of the things I expect you'd be most interested in.

What does strike me as relevant is the velocity of change there. Tangier was (May 2006) experiencing a construction boom which I understand is driven partly on the monarchy's commitment to welcoming tourism, partly in preparation for Expo 2012. I would not be surprised to find living expenses rising in the future.

We are very welcome there. I think some of that may be the mindset of the Souk, but much of it seemed to me perfectly genuine. [surfer-x: Tangier coastal surf 6/glassy in May. Locals swear it's like that fall-winter-spring.]

On matters of finance, I have found Adam Starchild's The Offshore Entrepreneur generally helpful. Online table of contents and some abstracts are at:

http://www.cyberhaven.com/offshore/sample

Brand said:
Right now I am seeing ads for golf course and beachfront property in Morocco... [is this a good idea?]

Morocco is not a bad place to live - the cities (tangier, rabat, marrakech) are relatively cosmopolitan and have enclaves of western expats, mostly european. In general, urban facilities (roads, power, water) are in decent shape.

Although the theocracy is not very vocal, their influence has been rising slowly. It isn't a problem yet, since the natives are not prone to going nuts over silly stuff. It is a predominantly islamic country, the law is based on islamic law (with french/spanish influence). It is hard to say which way this will go over the next twenty or thirty years.

Personally, I wouldn't buy property and move there to retire - although it is a tremendously fun place to live in - as long as you can get out if needed. :-)

SP

I haven't had time lately to read my favorite blog. But I wanted to share this today. Is Lennar smoking crack? Unexpected loss? Come on guys...

http://tinyurl.com/35w4p5

Brand,

Could we just forget I ever posted that cyberhaven link? I read Starchild a long time ago and remembered being interested. Now it looks like cr#p.

"Rich emu, Poor emu" LOL!

Where do I get MY copy!?

I thought this article was emblematic of America.

http://biz.yahoo.com/cbsm/070620/8d95be7caf994c909605fad32361c515.html?.v=1&.pf=retirement

Investment companies trying to profit off of the sheeple’s apathy. They want to profit by default from people who don’t care and are unwilling to take any active role in their retirement portfolio.