patrick.net

A true story of madness and (shortly) woe ...

Imagine a 60ish woman, with a paid for house and a middling investment portfolio. Somewhat at loose ends, she became a realtor two years ago and has just found her sea legs in the business. No great boom in her area, unlike elsewhere, so she hasn't made all that much money at it. Figuring in mileage and marketing costs and electronic gadgetry and desk rent, it's probably sub minimum wage. A small pension from her late husband's employment plus the realtor gig doesn't quite cover the monthly nut, so the investment portfolio is set up to throw off cash. There is no way of avoiding the truth though: half her net worth is undiversified residential real estate. Financial adviser warns her explicitly to stay away from more real estate because she's overexposed as it stands.

Of course, realtors know everything about real estate. Visiting children (and grandchildren!) three hours drive away, a bargain presents itself. Waterfront. Charming. Close to grandkids. Tenant in place. Makes an offer, has it accepted, all contingencies including financing expire. Contract ironclad, close in two weeks.

Net worth now 80% residential real estate, still undiversified because 3 hours away isn't far enough to change dependence on local economics. Back of the envelope figuring: new house is a grand a month negative cash flow against the mortgage broker's cheapest recommendation of an IO. Unwilling to sell current house to fund purchase and move because (1) spring is the right time to sell, (2) she's a realtor and she knows in her bones that the market is D-E-A-D, and (3) she's just gotten her business presence established where she is now.

Let me summarize: No financing commitment in place but financing contingency has expired. Barely making ends meet now but has committed to burn a thousand a month from here on. 80% of net worth now in one real estate market. The house she needs to sell - but does not WANT to sell - is in a locale where the inventory/sales ratio is already at 15 months. Local sales rates - but not prices - are at the lowest levels in 10 years.

NOW she calls her financial adviser to ask, "How do I pay for the new house?"

I shouldn't have picked up the phone.

Punchbowl Says:
Back of the envelope figuring: new house is a grand a month negative cash flow against the mortgage broker’s cheapest recommendation of an IO.

hmm, well, that is the sole problem. Why would you 'invest' in something that costs you a grand a month with no real prospect of significant capital appreciation? How is that ever a 'bargain'? And that is on an IO loan, not P&I...

Examples of moneymakers to me are:

- a licensed boarding house put on the market near me, 7 bedrooms, 1 minutes walk from the central station in a major metropolis, asking $700K. Licensed B/H status means that there is no land tax to pay each year, only a $200 council inspection fee. The return on the room easily covers principal and interest on a loan. Cash flow positive, would be paid off in 15-20 years by tenants even on a 100% loan.

- block of land with an old worthless shack on it, street frontage at front and rear, close to train station, city and major hospital, plans approved by council to subdivide and build 2 brand new brick homes of 3 and 4 br. Do the sums and see if you can walk away with $200K in 12 months as a cash flow venture. Possibly even avoid stamp duty and capital gains tax if you do it right by occupying while constructing.

Does anybody have the Lereah book cover that someone already made over?

image from amazon?

Just clicked on made me laugh my ass off! I actually own a hookah but I never have tried kool aid. I have tried the fruit flavored tabacco's.

Punchbowl,

Great "case study" and thank you for sharing that (however close to home). Here's how I've contended with that very issue in the past.

I'm among a handful of folks here in the PNW that actually have the capacity to allow clients the use of their IRA's for RE. (I realize that's going to sound awfully conflicted) but most of what we have done is more along the lines of repo's, tax liens etc. What I usually explain to the client is that if you're not generating POSITIVE cash flow it makes more sense to own this NEGATIVE cash flow property OUTSIDE of your IRA!

This approach couches the whole proposal in an entirely different light! Meaning yes, you will be highly unlikely at these prices to be able to generate positive cash flow! Since you'll be doing this little venture entirely with hard earned dollars from your IRA are you SURE this is something you still want to pursue? If the answer is still yes, can I recommend you chase this folly outside of your IRA (that way at least you'll be able to write off the depreciation!)

That "take away" usually (but not always) nips the whole thing in the bud. If they STILL want to move forward by all means steer them toward a "non-recourse" loan so the worst case scenario is they'll come up w/25% down (vice 100%) and the "non-recourse" feature of the loan provides that only the RE portion of their IRA is in "peril". When they ask what do you mean by "peril" you go on to explain that if/when this entire neg. C/F facade falls apart the lender will not be able to liquidate their stocks, bonds and MF's to satisfy the loan! (That usually puts the brakes on the whole idea).

I realize this entire approach is a "little" under handed but if it means saving ONE would be RE specuvestor from near certain death......... then it was worth it. I tell clients, don't give up on the idea! There will be an entry point that DOES make sense. Just not now. Set up the acct. anyway and fund it w/ 5-10K (@ mmkt rates) so you have earnest money at the ready in the event something really appealing presents itself!

(I have a lot of 5-10K accounts standing by, at the ready!)

What a blast!

Can you actually buy one or is it just a "graphic"? An "updated" version is long overdue. I'd hate to see young people getting the wrong idea that getting ahead in life centered around sacrifice, saving and hard work so this newer game fits the bill!

Anyone see this site yet?

SHTF,

Congrats! Does that mean you'll stick around the East Bay for a bit longer?

SHTF,

Hey man, how you doin'? Good to hear about your new job! (Careful not throw your back out with that new paycheck!)

Yeah we're still here. Hey since the thread is all about graphics dazzle us w/some of your favorites!

allah,

While an admirable "grass roots" effort just look at how out of the loop the appraisers are! They're forced into setting up a petition just to get the ball rolling. Shouldn't the word of their National Director be enough?

Maybe we should make DL run around town and collect signatures every time he wants to make a claim. Of course his time is much too valuable for that.

SHTF,

Why not "sheckle away" some of d' extra bucks in your 401K, wait for the kitchen utensils to hit the linoleum and use that first time buyer provision in the plan! Bunky!

SHTF,

Long time no post! Good to hear you're doing well. So are you sticking around the BA for a while then?

allah, your Monopoly parody was awesome!

HARM,

Does that mean it's *not* a Milton Bradley (TM) Approved for ages 3-9 product? Man. And here I was ready to get mine on order before the holiday rush!

allah, your Monopoly parody was awesome!

What parody?

DinOR,

Oh "if only" we could get the ok from M.B. to manufacture this sucker!

Nah, that's not mine! Give Aaron Erimez the credit for that, not me.

allah,

I'm pretty much a self-taught Photoshop rank amateur myself. How did you do the cast-iron Hummer 'token'?

Ahhh... never mind.

allah,

RE: Appraisers Petition

Yeah, SoCalMortgageGuy brought that to our attention a while back. Good luck getting it passed before '08 though (after most of the option-ARM shit hits the fan). Funny how most of the responses are from Viagr@ and NAAVLP spammers!

allah,

I’m pretty much a self-taught Photoshop rank amateur myself. How did you do the cast-iron Hummer ‘token’?

HARM,

That is NOT my work. I like you am a self taught photoshop amateur. If I did something like that, it would probably take me the better part of the day to do it and it probably wouldn't have come out nearly as good.

David Lereah,

Go pound sand!

Check out David Lereah's link to "his" myspace site. Funny stuff.

I deeply resent the use of my image in this way. Let me assure anyone found misusing my name and image will be prosecuted to the full extent of the law.

I play a vital role not only in the field of real estate, but also finance and the world economy. My fans and followers rely on being able to trust my remarks.

I take full responsibility, sue me! :lol:

allah,

You've got to say that right, now damn it!

The correct way is to say;

"Go for it dude, even my company uniform is rented!"

http://www.dqnews.com/RRBay1106.shtm

October Bay Area housing numbers released.

David Lereah,

Welcome to the blog! We are most (dis)honored to have you here, sir! Your name often comes up in our many discussions about REIC propaganda, insider pumping/dumping and MSM dishonesty in general.

Just one question that's been puzzling me, though: what is the correct spelling of your surname? Is it "Liarrhea", "LiarRealtor", or "LiarRealtwhore" ?

Anyone notice how a lot of the babes listed as DL's MySpace "friends" really are bona-fide Realtwhores? I guess they're not all "in" on the joke.

lunarpark,

Well "prices" may not have reverted to OCT 2001 levels (but sales sure have).

Notice Marshall Prentice's comment that "the sky is "probably" not falling as some have predicted". (emphasis mine)

Well yeah Mr. Morrison B. Tuddworthy the freakin Third! Don't you think it's a little early to say the sky "probably" isn't falling! Comments like this have passed for "information" for years from the REIC and are not sitting well w/those "that bought at the peak and might have to sell" as Mr. Tuddworthy suggests. They are going to have to go back and re-think their whole spin effort b/c this stuff clearly isn't as easily palmed off as it was in the past!

Anyone notice how a lot of the babes listed as DL’s MySpace “friends” really are bona-fide Realtwhores? I guess they’re not all “in” on the joke.

I think they are only putting links to their pages for publicity, that's all. I think they know that it;s fake....but then again, you never know. :lol:

DinOR - I caught that "probably" as well.

@lunarpark,

Flat prices across the BA means that unless there was a steep drop off last October to November (2005), or there's a steep increase in prices this November (doubt it), prices will likely be negative YoY across the Bay Area the next time around. Looks like Santa Clara and Marin are holding up prices for the rest of the BA this month. Even SF is now down -0.9% YoY! Too bad ConfusedRealtor is not able to comment on that number. ("The sky is not falling. The economy is good. Life is good.")

I do think it's true that without a collapse in the economy (may still happen due to a RE collapse), there will be stickiness in the downward trend in prices, as Randy H has suggested. The same people buying the 3br/2ba in San Jose for $900K will be buying a nicer place in Mountain View or Cupertino, the ones buying in Cupertino will consider Palo Alto, etc. Buyers will still plan to spend the same amount of money (barring a huge runup in mortgage rates), it's just that they will be buying nicer places, in nicer locations, etc for the same money. This will keep prices up for a while, I believe. This is in part why these stats are a little misleading. If and when the overall jobs situation and economy turn, all bets are off.

lunarpark,

Sounds like George Costanza for crissakes.

You caught me! You caught me in a lie. My own....... web of lies Jerry!

Ah-hem. After 18 consecutive months of being almost single mindedly focused on lagging indicators and proclaiming;

"Indications of market distress are notably absent" YEAH, people are going to gravitate towards anything that looks like a deviation from your position! However slight. He's had the wind at his back for what Idunno......7 years. Yeah a fella gets comfortable. I'm so used to these "bump in the road" comments they barely even register anymore.

@"David Lereah",

The time to buy a home has NEVER been better

Actually, according to your most recent ad campaign (that hit all the major newspapers & publications), isn't now "a great time to buy or sell a home"? So, either buying or selling is A-ok, right?

skibum,

I can to a certain degree get on board w/the notion that buyers will look "upstream" so to speak but as Peter P noted there's a certain psychology that goes along w/that too.

When we first started seeing prices "crest" here in OR last year this time there was a real sense of relief! Kind of the sense you'd get when you bought beer for your younger brothers. It's daylight the next day and you haven't gotten a call from the police! (That kind of.......relief?)

As spring 06 rolled around we were no longer concerned w/ever higher prices and began to see "Reduced" signs in print, on the internet and on lawns. Hmm? Now for the 400K we were planning on spending we could get a pool. Hmm (waits another week) now we can get a pool AND all new high end appliances and so on. Again the BA may well be different but a sort of "buyer's snobbery" develops and I'm getting pickier and snobbier by the day. That's just me though.

DinOR's younger brother

I just wanted to say that DinOR is a stand up guy! Hell I've known him all my life. He would NEVER provide alcoholic beverages to a minor! That's just plain ridiculous.

Oh man... the tips here are awesome:

http://www.flippernation.com/tips/default.htm

2. Starbucks proximity.
Must be within 3 blocks of a Starbucks. Poor people can't afford Starbucks, so then you know you're in a nice neighborhood.

Of course!

Speaking of the Bay Area DQ numbers, one place I've been tracking a bit is Menlo Park. Has anyone else noticed that of all places, MP has had significant price declines over the past several months? Is that due to more sales in the sketchier side (closer to 101)? Or are prices just dropping faster there? Any insight would be appreciated.

Again the BA may well be different but a sort of “buyer’s snobbery” develops and I’m getting pickier and snobbier by the day.

@DinOR,

This "snobbery" may be true, but I doubt it will keep potential buyers from buying forever. People keep saying how no one is buying now, the market is dead, etc., but there are still transactions happening. Sales dropped 20-30% in the bay area, not 100%. All I'm saying is that there is always a segment of the population that still wants to buy and sell, market be damned. The sellers are reluctant to lower prices, and even if they do, potential buyers aren't likely to just say, "hey, let's buy this same house we've been eyeing for X amount less!" Many will instead, think, "Hey, let's take that same amount we were planning to spend and look in a better school district, or look for a McAlbatross with 4 garages instead of 3, or with real hardwood instead of Pergo (TM), or in a subdivision with McMonsters 10 feet apart from each other instead of 4!"