patrick.net

I see DinOr is here. He'd know too.

Garth,

I love ya like a brother but PLEASE don't make me say this again.

NUMBER 1 cause for bubble?

1997 Legislation that allowed up to 500K in cap gain FREE money! (250K) for singles. All of the other issues are important but if rank and file Americans had to pay 15, 28 or 35% capital gains when they sold their homes (or extracted equity) would we have this problem?

Mmmm, rich people.

DinOr

I believe you. But it's funny, as a licensed atturney I didn't know the old rollover rules had changed when I sold.

My Realtor team, one is a CPA, had to explain it to me. I talked to several other lawyers and judges I know. None of them knew about the new exclusion rules.

So for the masses of poor slobs like me I wonder about the impact on decision making. Also I note that the speculators will have STCG, so they wouldn't get the exclusion, no?

SF Woman, Garth,

We can make this real simple. Randy H always hammers me/us on "reversion to the mean". We can take say 5 year increments and look at the appreciation in the median home price in America/CA (your preference) and any deviation above that is fluff and hot air.

Garth,

The fact that you weren't aware of it is my witness. If you had been surrounded by grumbling malcontents that begin their conversations with the "those damn cap gains" you may have thought long and hard before selling.

Garth,

I have to believe that alot of specuvestors had quit their dayjobs to flip homes. Unlike folks like ourselves in professional services where we struggle to come up with legitimate deductions the STCG is specuvestors only real tax. B/c they have a paper trail for the $'s spent on the renovations they may have been able to offset alot of the gains anyway. My guess though is that alot of these folks didn't bother with the quarterlies and many may not have bothered with a return!

This is amazing to me that an institution can count unearned wealth as profit so soon after the Enron Scandel that was based on similiar practices. As far as 40% of homes being investments, I'd believe it. The fact is that the 2 or 3 homes that have sold on my street in the last year have nobody living in them, and ever so often, a truck comes by with a crew to spruce up the yard is proof that they are all indeed investments. I am willing to put money on it that at least 50% of the homes sold in California, and maybe higher in the Bay Area were investments. They will all likely be put up for sale this spring. Can you imagine the inventory? Of course I would think that RE agents and investors wouldn't be stupid enough to place their homes up all at once. That would be far too obvious of a mistake, but then again, I imagine these people are going to panick if they aren't already.
A sad story- One of my neighbors lives in a large, run down, crummy victorian that his father bought. He inherited it and now he himself is in his 60's. He had a beat up old truck and lots of carvings out in the yard. Pretty unique local guy. Anyway, within 3 weeks, the old truck gets sold, he buys a new truck, and starts making trips back and forth, throwing his stuff into the back of the truck. The place was cleaned out in a week and now there it sits for sale, for 720k. Sad really. I can't help but feel that what character many of these places had, where average people once lived will be replaced with office cubicle monkeys and upper executives.

DinOr,

Point taken.

When I found out about the $500 exclusion I wanted to start all over. Then I found Patrick.

SF Woman,

Many in New England as well as the Capitol were able to take "full advantage" of the exclusion. While many in the mid-west and more affordable markets may not have flirted w/500K free ride, they may have gotten it in "bites". Let's not kid ourselves. When we have 50K or 500K in tax free money dangled in front us we can fabricate alot of reasons as to why our current house just isn't right for us!

SF Woman,

I'm not sure but I think the rollover rules are still there in the background for the very rich who want to stay in real estate. Or maybe take a short breather. Unfortunately, that wasn't an issue for me.

You should check with a qualified CPA. Or even a qualified Realtor you trust.

Garth, SFWoman,

The fact that you were both long time residents makes you "dead money" to a realtor. They need "money in motion" so they tend to focus on the "players". Believe me, mortgage brokers look at their book of clients and they know EXACTLY where all the loans are at. Their FICO's etc. They know they can go back to those clients they put into ill-fitting loans (and some do so intentionally) so they can go back and harvest fees again. Realtors did/will try to do the same thing! They will start bugging everybody they sold to 18 months ago so they can go back and "flip" the client into another property knowing full well that taxes are not an issue.

Again, this above all other "bubble factors". It's commission driven.

SF Woman,

Now I'M confused. Prior to 1997 you HAD to roll your profits from the sale of the previous home into a residence of equal or greater value to be excluded from cap gains. After 1997, ORGY! Married couples could take up to 500K in tax free money out and do as they please. Thus the explosion in second homes. If it worked good once, why not take advantage of the multiplier effect? (Mind you in 1997 the median price of a home was substantially lower than today). Linda in La La Land had to pay ONLY on the excess amount OVER 500K. Even at that, she was able to offset to a degree b/c of some improvements they had done. The discussion now is that the cap gains exclusion should be moved out to 3 or even 5 or 10 years. About time. Also there is talk that the deductibility of mort. int should begin to evaporate above the median price in your area. About time. Also a word to the wise; a little birdie at the IRS told me that they are going to begin looking long and hard at 1031 Exchanges.

John M,

The guy I spoke was in the Chicago Office and was about to retire. A "short timer" has nothing to fear, I mean c'mon what are they going to do? Take away his birthday? Anyway, he explained that 1031's had become so perverted that the IRS has been forced to take a dim view. Before the 1997 legislation this was very necessary. Now? He explained that the "service" is now aware that developers actively seek out property owners that have developable land and are using the 1031 as a means to circumvent the law. But you're not selling your land (or sub-divideable land) to a developer? Why me? Thank all of those that abused the honor right out of the honor system.

i'm intrigued to juxtapose these two different observations - no criticism of either. one is talking about the individual psychology of 'keeping up with the joneses', or what david levine calls 'meeting esteem needs', and the other blaming greenspan for the fact that households are up to the wahoozy in debt...when greenspan didn't force them to go into debt, it's a decision they made. (note from my blog, a few articles down, that australian households are in exactly the same position vis-a-vis debt...)

i think these are two sides to the same coin - personal psychology and the 'me too' factor creates the market conditions; on the other hand, a lot of younger people are forced to take on more and more debt just to try to get into housing... however, my point is that owneroccupier's guy did not have to start flipping to make a buck, he could've had a comfortable life without it - so it's invidious comparison, not quite 'competition'...

Owneroccupier Says: April 5th, 2006 at 5:58 pm
how did we end up with so many amateur “investors”?

I believe that they are not compelled by greed. Instead, they are compelled by fear and competitiveness. A friend of mine who took on more than 1.2M mortgage, flipping 3 homes. He has a kid and another one was on the way, till his wife had a miscarriage, due to pressure, I guess, because they absolutely need dual salary to make it through every month.

Last year, when he was contemplating buying his last “investment property”, I asked him why he wanted to be so aggressive. He was a bit insecure so I never dared to tell him that he was totally setting himself up for failure. He noted that he was “lagging” in building his wealth as compared to his friends, and he felt pressured to catch up. Flipping homes seemed to be the only route to quick bucks. He missed out on the dotcom lottery (a close friend of his who has almost the identical background and skill sets lucked out and bought a home in Los Altos all-cash), so he didn’t want to miss out on the next get-rich-fast scheme.

I wonder how many “investors” were sharing the same mindset.

Ha Ha Says: April 5th, 2006 at 6:59 pm
For me, Greenspan is the savings saboteur, par excellence. There are two sorry tales of savings. On his watch, first we have seen the steady erosion of personal saving as a percentage of disposable income; and second, the eventual devastation of net national saving after the bursting of the equity-market bubble in technology, media and telecommunications shares in 2000.

Ha-Ha,

You are the devil sir!

John M,

I hope the person that desreves the credit steps forward on this one. A participant on this blog mentioned that buying a home is not the fun that it used to be! A happy, gleeful time full of anticipation and excitement. Yeah, right. I don't want to beat it to death (it's probably too late for that) but this is exactly what happened when the "exclusion" passed into law. That's how we wound up with so many "investors".

Question:

I'd like to know people's thoughts on how to make money as housing market crashes or after the crash.

Any strategies?

Die Torschlusspanik? Natürlich kommt die Zeit.

Ich bin mit meinem shadenfreude glücklich.

Michael,

One simple, non-speculative way to benefit as the market crashes is to buy a home. As prices come down, and sellers start to panic, you have the maximum leverage as a buyer. Assuming you've saved your HaHas, you can get a good old fashioned fixed-rate loan, be ready to put down 20%+, and then go around low-balling sellers until you find one desperate enough to take your solid bid.

Just my opinion, but unless you're really a pro like FAB or Zephyr, I wouldn't try to time the absolute bottom of the market. My reasoning is that you have more buyer-negotiating power on the way down than on the way back up. For most regular folks negotiating has more of an effect on their outcomes than ultra-precise-timing.

SF Woman,

I don't speak German either (like Randy H isn't hard enough to understand sometimes)!

Prior to 1997 the "deal" was actually pretty good. If you were over 55 years old you could take a *ONE TIME* exemption! Meaning you could sell your home as "empty nesters" and downsize without it being punitive. But Nooooo........

Your friends that moved to Shaker Heights were so typical of the time. This is the very situation that precipitated the passage of the 1997 legislation that btw also ushered in the Roth IRA. You could begin to see the "ground swell" gaining traction almost immediately.

How am I going to time the bottom? I'm not really going to try. I'm just going to seek out homes which fit all of our needs and some of our desires. When these homes are around 20% more than I want to pay I'm going to start writing offers for them at about 30% less than asking. Actually, I started doing this very thing last week. I don't expect any takers anytime soon, but I am encouraged that the sellers aren't just ignoring the offers, they're taking them seriously and countering (usually about halfway...which you sales-types will appreciate as the sellers falling right into negotiating 101 and the reason to anchor very low). Now I have not intention of buying one of these at halfway or 10-15% off, because I think that's still overpriced. But, I'm also not in a hurry so I have time to plant lots of seeds.

As time goes on and the market comes down so will the relative price of my offers, but the absolute dollar range will narrow. Since sellers tend to think in absolute $, not in %, our "zone of possible agreement" will converge and eventually I'll get a home I want for a price I'm happy paying.

This won't time the bottom of the market, but I'm not buying a home with the misconception it is an investment. A home is (1) a place for my family to live; (2) a form of forced savings vis-a-vis equity; (3) a way to avoid the annoyances of renting. I'll worry about hedging inflation, securing against the USD, hiding from oil prices and fretting about the current account deficit in my E-Trade account, not in my house.

*Investment advise? My advise is that all advise is worth what you paid for it. Use your own judgement.

Die Torschlusspanik? Natürlich kommt die Zeit.

Ich bin mit meinem shadenfreude glücklich.

[...]

I don’t speak German

Torschlusspanik: "Rush for the door", or a more precise definition. Literally: Door-closing-panic.

I said: Rush for the door? But, of course the time is coming. [Until then] I'm happy with my schadenfreude.

(I thought I was cute using one Englished German word in German sentence based upon another Englished German word. I guess this is the closest I come to poetry these days. *sigh*)

Randy H,

Your explanation to Michael should be "the playbook" going forward. And it wasn't too hard to understand either! That will be the next wave of financial self help books. "How to profit from the RE Crash" In fact I believe there are already a few out there. Hey, I was going to ask you, Patrick has recently linked daily articles from a certain Charles Hugh Smith lately and I can't really find anything about this individuals credentials. He seems sensible enough but I find myself wondering if he too hasn't jumped on the "crash bandwagon" of late as well.

skibum,

A couple of specific points: I've seen only a couple counter-offers, but when I tried this strategy about 10 months ago I experienced selling agents refusing to even present offers to their clients (even though I'm not sure this is within their code of conduct as per some discussion generated here last year). Secondly, I am targeting homes which have been on the market a long time and haven't sold, but are quality homes (not me-too listings). That is I'm looking for overpriced listings. The last was a home that has re-listed 3 maybe more times, and the sellers have raised the price each time. I think it fell out of escrow once. Zillow says it's about .99M - 1.2M based on comps, but the sellers just re-listed at 1.45M. I offered 1.05M, or just under 30% off asking. I'm in South Marin and targeting MV, CM, LS.

Oh, and I never bid on "multiple offer" situations. I always ask the agent if there will be other offers (they always say yes), then I say "no-thanks". If they come back and solicit a bid I use my gut-intuition to read if they're trying to get a second bid. If so I tell them "naw, I'll just wait a while and see if it sells".

Skibum,

As usual Randy is right. Here in Oregon I've made a few offers well below asking that were not accepted. HOWEVER; I did calls back from realtors months later to ask if we were still interested in the home. It is SO much fun toying with them to see what they'll say. Btw, it is the realtors that are pleading with sellers not to be such greedy a$$holes! Imagine that? With sales volumes drying up the realtors need a sale yesterday, and this is what I've always said would start the "correction". Peter P has always said that we don't need a crash, all we need is for prices to stall out. Hard to argue with him too.

DinOR,

If you care to help coach people on negotiating 101 feel free to start a thread here (I think you have authoring rights, if not let me know). I think your expertise could help prospective buyers quite a bit to understand the mechanical side of negotiating tactics. I am a firm believer that negotiating will be much more important in claiming value than macro-economics of all this stuff we talk about all the time.

For example, how can a buyer use the seller's agent to her own benefit? How does Ms. Buyer set up a negotiation such that she, her buying agent and the seller's agent are all working towards her own price/value goal?

Randy H,

Thanks, btw I did check out Cap. 2.0 and it's actually pretty good! For those among us that may not feel up to negotiating please remember that it is YOU that will be making the payments for the next 15, 20 or 30 years. Every dollar you don't borrow is 3 to 4 dollars you don't have to pay back. Everytime somebody says "lowball offer" the gut reaction is "insulted". Especially in smaller towns where you might actually know or know of the seller. For people in a town the size of San Diego I can't imagine where the reservation might come from! But when you "lowball" you have to GIVE something. The give is a big part of "making nice" and believe it or not goes a long way toward building a rapport with the seller. Just make sure the "give" is no skin off your nose, like "I don't have to move in until _____ date! Hell, none of us here are in any hurry! Go ahead, let them feel good about themselves, write the offer something like "upon finding suitable accomodations" or whatever. Make a list of things you would like to see repaired and then back down on like 95% of them. You're "making nice" here so no need for them to label you a heartless bottom feeder. Then comes the moment where the realtor really, really needs the sale and says something like, "you know this really isn't a bad offer" and then they can go through line item by line item on all of the concessions you've made as a buyer. The realtor knows this is BS but they need the close. Like Randy says (and I can't say enough) yeah, the macro picture and timing are important but not nearly so as our ability to create our own deal. Remember, make nice.

George,

Great insight on the types of sellers to target. Indeed, finding a seller that isn't pricing on a "needs basis" is probably more fruitful than trying to find someone two ticks away from bankruptcy (even though this may seem counter-intuitive). Buyers need to keep in mind the "escalation of commitment" psychology. As one becomes distressed they are prone to take bigger and bigger risks because they feel they have little left to lose and may just get that big-win to bail them out. A better seller is one who can afford to sell to you at the discount.

A better seller is one who can afford to sell to you at the discount.

For similar reasons I will not rent from anyone with a negative cashflow on the property.

John M
Last weekend I found out my previous home(that I sold last Aug.) was up for sale for 200K more than I sold it for...don't feel bad...don't look back! The cap gains law DID affect my choice to sell and I do agree...that law was put into place when being a millionaire meant something. When I had bought , rennovated and sold previously, the law was not in place. When I moved into the neighborhood in 1997, my neighbors thought I paid too much for the house at 325K. Little did we know that in 5 years our hood would become a million $ neighborhood. The smallest house goes for about 850K. Just crazy!
DinOr
Yes! The art of negotiation! Now that's something I'll need to educate myself in. I've done ok...but I only know enough to be dangerous!
I'd love to see a thread on negotiation 101. :P
This is how I plan to profit on the crash. No gold or stocks. I've tied some $ up in CDs..primarily to STOP me from even THINKING of buying now. The market here is 'frozen' according to the realtor representing my old house. I have to sit on my hands to wait till there is a significant fall with significant panic before I jump. Heck...I'm the cat watching the canary...poor birdie! :twisted:

Randy H,

I like the "escalation of commitment" as well. It takes the sellers focus off of price and price alone and brings them meandering down this trail of minutiae that you are starting to control. A big part of closing (no matter what side of the transaction you're on) is to let the other party have some dignity! Especially in the "Age of Zillow" the seller can say "Well, that's true, we did sell at X but the buyer let us spend the summer/fall/holidays here and they didn't nit pick us to death". It can be hard to generalize but look at the sellers age/situation and try to imagine the "give" that will appeal to them the most.

How about asking the seller to pay 3 points and other closing costs?

3% of 1M is only 30K but that will drop your 30YR FRM interest rate to below 6%. The seller can have some dignity and your payment will be considerably lower.

Peter P,

Excellent suggestion! In OR what we are finding (and I think George may have mentioned this is FL as well) is that you can offer full price (I can't believe I said that) but the seller pays everything. Sometimes I've heard of cash back at closing, flooring allowance (wink wink) and even trips. Personally though I think we can do alot better by moving the "line of scrimmage" substantially back by a low ball offer to begin with then loading them up with demands and then backing off those demands that don't really matter to us anyway.

DinOr
Good stuff...escalation of commitment...It s about getting them to spend enough time with your offer going through the details instead of instantly disreguarding it as lowball. Brilliant!

Linda in La La Land,

The gentlemanly term you describe above is attributable to Randy H. Me? I call it sex. It's a shame more of us don't. Not the "Hey, I bought a bunch of drinks here!" type stuff. I'm talking about the way business used to be done! Everyone makes their list of causes for the HB but right after the 1997 legislation is the cryptic (and lost world) of negotiating. In the 90's when things were rockin' and rollin' people were getting ESOP's and bonuses so they would go and look at a home and say, Yeah, we can afford that. Without so much as a wimper! Then we wonder how sellers got so bold. O.K, so now I'm doing some serious revisions to the list but I DO feel it's a very important factor.

I’d love to see a thread on negotiation 101.

I'll second that!

DinOR: Fantastic tips on negotiating give-and-take. It's obvious you've learned this from first-hand experience, which makes it "real life" and all the more valuable.

George: Great tips on whom to target. Totally flies in the face of typical "target the deperate/pre-foreclosures" advice, and I completely see your logic here.

DinOR & George homework assignment:

1. Email Patrick (p@patrick.net) and ask him for thread moderator rights
2. Get familiar with WordPress administration tools (it's easy -- just go to main page patrick.net/wp, look on right-hand side, find "Site Admin" link under "Meta").
3. Author a new thread on Buyer Negotiation 101 (DinOR) and Types of Sellers to Target in a Falling Market (George).

Why do we need a new thread on investing 101 ? THIS IS THE THREAD !

Great stuff guys. Thanks a ton for sharing these tips, strategies to complete strangers ! Sometimes even friends don't disclose all the tricks they know.

Why do we need a new thread on investing 101 ? THIS IS THE THREAD !

Actually, we need more contributing moderators here. 90% of the threads here are posted by the same 4 people: myself, Peter P , Randy H (who's now busy with his own site), Surfer-X & SQT. Occasionally, there a few others contribute (San Francisco RENTER, brightc, matt_walsh, Girgl, etc.) but it's not enough --yet.

We need new moderators with fresh perspectives/experiences. If 10% of regular posters contribute one thread a month, that's still a big improvement over today.