Tucson Kent's World: July 2011

The Real Estate Hall of Shame - not sure if anyone has built one yet, but I found a property today that could qualify as a good place to house the "How Not To Use Equity In Your Home" exhibit.  I think it used to be Homer Simpson's place.  He lost it to foreclosure.

Lets take a peek behind the scenes and see how this property might qualify for Poster Child status on the Real Estate Hall of Shame:

Lets see...Homer bought it in 2001 for a little under $300,000. Bear Stearns got it for $465k last fall.  Don't see any problems so far - probably a typical foreclosure on a note gone bad, purchased by the investment bank for pennies on the dollar.

This doesn't look so bad - what qualifies it for the Hall of Shame?  Lets take a look at the loan history:

Okay...lets see:  the buyer put down a little less than $15k - which works out to roughly 5% down back in 2001.  No problem yet...less than 2 years later, the owners refinanced for about $20,000 more.  Could have needed to pay somebody's tuition or something.

But wait - look at what happened in 2006!  (Gee, isn't that when the market was going gangbusters & everyone was going to get rich quick?)  After only 3 years, the owners refinanced AGAIN, but for 231% what it previously was worth!

Kind of strange how we dismiss claims of investments that promise amazing returns or "long-lost gold mines" as foolish or the stuff of legend, not reality...but not when it comes to our HOMES.  

"Lets get all of the equity out of our home, we're GETTING RICH QUICK," Homer Simpson says to Marge, "they might change their minds!"

But WAIT...another year passes and lo & behold...the value has gone up ANOTHER 25%! 

"We sure could use another $160,000 - now I can get that boat I always wanted & Marge can have that fur coat to wear when the temperature drops below 80 degrees...and I can show up to my high-school reunion in a shiny new Benz with spinners on the wheels!" -OR- "This real estate thing is a SURE-THING! It will NEVER GO DOWN...lets buy 3 or 4 other homes to MAKE MORE MONEY ON...we'll be ON EASY STREET!"

Homer refinances again in 2007, again pulling out all of the paper "equity" in the home - probably with an interest-only loan that adjusts after 3 years (which was the only way they could afford the payments on their $800,000 home that only cost $280,000 such a short time ago.

For some crazy reason, the lenders want Homer to pay the money back, and the home isn't magically going up in value anymore.  The payments now start to include principal AND interest.  Can't refinance again because the property isn't worth what it used to be.  Time to sell the home!

But the market is going d-o-w-n.  It doesn't sell at the price Homer & Marge need to get out of their debt.  It forecloses.  Homer isn't rich anymore and Marge has to sell her huge hair to rent an apartment.  Easy Street has potholes that could swallow an ark because the City was counting on the revenue from all of these wonderful property taxes to fill the coffers that it depleted on consultants and studies to tell them how to spend all of that money that should be coming in.

It wasn't just Homer - Moe did the same thing with his bar.  Marge's sister Patty bought 3 duplexes and a new 3500 square foot home because she was jealous.  Otto the school bus driver got a loan to buy 20 acres with a bitchin' manufactured on it so he could turn his stereo up as loud as he wanted.  Ned Flanders put Todd & Rod's names on loan applications and is now being investigated for mortgage fraud.

This didn't just happen in Springfield, or Tucson.  It happened everywhere that values on paper rose extremely quickly.  Apu still has the home he bought in 2002, and is easily making the payments.  He just bought 3 more Quickee Marts at bargain prices, and is thinking of getting a bigger home since prices and interest rates are super-low.  Principal Skinner & Groundskeeper Willie have been buying foreclosures, fixing them up and making a modest profit renting them out (which proves even a numbskull like Skinner can make smart decision if he doesn't get greedy).

Springfield is slowly coming back to normal (as is Tucson).  Some people are at different addresses than before, some the same, but a sobering reality has set in & a lesson learned:  "If it seems too good to be true, it probably is."

Did Homer learn anything?  Probably not.  He's trying to get all of his friends and family to come to a party to celebrate becoming an owner of a business that will soon make him money while he sleeps.  He's changing his name to Homer MLM Simpson to show his dedication & commitment in front of his "Double-Platinum Diamond Distributor/Coach.

The property?  Oh yeah...its still in good shape, in fact, it really is a good deal.  Now.  It can be yours for a little over $400,000.  Needs a little work, but not too much.  If you were smart with your money and still have some, give me a call.  I don't have any get-rich quick steals to show you, but I do know how to spot a solid investment in real estate.

Buyers often ask me "Can I put in a really low offer on this house?"  The short, simple answer to that is that anyone can offer whatever they wish on a property.  What really matters is if the offer will be looked at...and even considered.  A few times I've had clients who really, really liked a particular home, but ended up heartbroken because, in their attempt to "get a steal" because "it's a buyer's market," they either poisoned the seller against them or wasted time in a competitive foreclosure market by offering w-a-a-y below asking price.

Lets take a look at a typical scenario:

Buyer A is approved for a loan that will allow them to buy a home priced up to $200,000.  The question comes up about the possibility of offering say $200,000 on a property priced at $225,000 (which is a 12.5% discount).

There's absolutely nothing wrong with offering that, if comparable properties in the area are going for the lower price.

In reality, chances are, that offer won't even get a response. Generally speaking in the Tucson market, prices being asked nowadays are fairly close to what the market is bringing. If the seller is asking more than what the market is showing, you can just about guarantee that asking for a discount like this is going to be met with rejection instead of a counter-offer back. If it is a bank-owned house, you don't have to deal with the "human factor" i.e. "ego" like you would with one that is owned by a human being - there's nobody that would take personal offense or get cranky about a "lowball" offer - but they have their bottom line too, and a rejection is a rejection.

In the Tucson real estate market of today, many bank-owned homes (aka REO, foreclosure) are underpriced and seeing multiple offers in the first week or two.  Taking the time to submit a lowball offer and wait for a response can often be an exercise in futility - with a more realistic offer (many times OVER the asking price, but within comparables for the area) snapping it up before another offer can be made.

Most often, a home priced above market IS owned by a real-live person who is still attached to their property emotionally, and either can't or won't face the reality of the marketplace. Many times, the home will have been sitting on the market quite a while (DOM or, Days On Market), and will probably remain there for quite a while until the seller either takes it off of the market or comes to grips with it & eventually lowers the price.

If you see a home that is priced at $225,000 and want to offer $200,000 on it - I have no problem putting together the offer...just realize that the likelihood of positive results are close to nil in today's market. We could get lucky, just don't count on it!

Something else to factor into an offer is whether you want the seller to help pay your "closing costs" which generally run about 3% of the purchase price ($6000 on a $200,000 home). Typically, sellers in today's market are willing to help out that way, but not with a large discount on the asking price included...it is like asking them for 2 discounts at the same time - similar to showing up at a resort offering "Locals Only Summer Rates" and wanting a AAA discount on top of it. You might get one, but not both.

I also work with investors who are market-savvy, looking at capitalization rates, market saturation ratios, historic vacancy rates & projected growth patterns...the principles work the same way:  If the property works for you, and you want it, messing around may cost you a good property.

Smart investors know where the market is & are willing to pay the price because it is right.  Amateurs, blowhards & wannabes "paper the town" with offers looking for "the steal of the decade" while others make money.