Does "Investor" = "Sucker"

I was chatting with an acquaintance this morning. She didn't realize I was a Broker and she didn't realize I understood income property. It turns out she really could have used my expertise a couple years ago.

She had bought this property in Fort Worth because it was "cheap" and it was brand new. Sounded great.

It was sold to them based on an anticipated rental income of $850/mo - which seemed like a good return because she'd be able to cover all the expenses and have a little cash left over. She also made the assumption that the property value would increase over time.

After they purchased the property they worked to rent it. They didn't hire a professional manager because they "forgot" to figure that cost in and that would erode their cash flow. It turned out to be very difficult to find renters. My friend had not researched the local market and expected renters to line up to rent her property, just like they did here in Silicon Valley.

The property went unrented for one year. It was broken into and vandalized, which cost money to repair on top of her monthly payments. She did finally find renters when she dropped the rent low enough, it's rented at $700/mo. Which just covers her payment.

It sounds like she is one of the lucky ones because, some of her neighbor investors still have vacant units. Many are looking for any way to bail out of their units. So, her expected appreciation doesn't look promising.

If she pays it off over the next 30 years she will eventually get a little cash flow and she does get to depreciate the property - which may offset her current income.

It seems like the stories in the media have all been about investors making 300% profits with little or no risk but, the reality is, investing is risky. People lose their life savings every day. Investor property has two HUGE differences from owning a home. 1.)An income property without income is a liability NOT an asset. 2.) Investor loans are all recourse - meaning the bank comes after you for any losses - so, it's really hard to "walk away". My friend is one of the lucky ones, she found a way to hold on for now.

My clients continue to do well, even in a down market. We've structured their purchases so that their properties cash flow, we calculated expenses based on "worst case scenarios", and even accounted for the rents adjusting a little. We did the research, we knew the risks. We bought strategically and intelligently.

Find a broker that's been around, one you can trust, one that knows the ins and outs of investing and one that is an investor themselves. Your friends brother's cousin that just got their license is probably not a good referral for income property. The wrong broker can lose your hard earned money but the right broker can make you millions!

Chasing Appreciation

I got an inquiry today about investment properties.

This prospective buyer is being told to buy single family homes in Idaho and New Mexico. Hmmm. This always reminds me of the "secret stock" whispers I hear so much of in Silicon Valley. Or the "plants" on investor pages, working to inflate demand on the penny stock they own 5,000 shares of so they can reap the rewards and dump it before the fall.

As a finance undergrad, I learned how to value stock and spot undervalued stocks. For years I thought I had enough information, knowledge and training to play the stock market game. Some of my colleagues have done really well and I just never got the hang of it. I think it's the same with the real estate market, there are some that are good at seeing the trends, jumping in early and getting out before the fall. Then there are some who play real estate like I play the stock market, they get in late and watch in disbelief as the market falls.

The big difference between the stock market and the real estate market is that you have to make about 10% appreciation in order to break even. It's not a $7.95 trade fee but title and escrow and commissions and vacancies and reports and marketing and....you fill in the blanks.

I have always done better with my real estate holdings. Maybe that's why I have been in the business for 19 years! [still can't believe 19 years!] But, I think the way I play the real estate game says a lot about my conservative nature. I play real estate so that I feel in control and limit my risk. I set it up beforehand so I am never forced to make a move. If my properties are paying all their expenses, maintenance and management, then it really doesn't matter what the market is doing. I can hold on. I am not at the whim of Bernanke's latest change of heart or a mysterious stock market scare or hoping that that "secret stock" doesn't mis-state earnings and plunge 70%.

For Sale By Owner

There is a listing in my neighborhood that is being marketed through one of those for sale by owner companies.

First off, because I am a Realtor and am bound by the Realtor code of ethics, I can not approach this owner because they are "represented" by this other company and that would be interfering with their relationship. [wish other people had this code of ethics!]

I've been watching this listing for a few months. I walk my dog twice a day and on our morning walk we go by the house. So, I've been wondering what the problem is. One day, out of curiosity, I checked and the property is not listed on the MLS.

First red flag!

Yesterday, on the way home from church, I drove by an open house sign. It's the sale by owner that I've been watching. I kept heading home and then,on second thought, turned around.

As I drove up to the house, I wondered if it really was "open". There is a big SUV parked right in front of the door and there aren't any signs out front. I double checked the open house signs and walked up to the door.

Hearing voices inside, I walked in.

The first thing that literally hit me was the stench! Air freshener but, super industrial air freshener and a dirty entry carpet. Hmmm

I walked into the house and the sellers, a couple in their 50s, were both arguing with some potential buyers. The woman was sitting on the sofa with her big fuzzy cat in her lap. The source of the smells that were "covered" by the stench.

The sellers were both dressed in jeans for the weekend and I wondered how serious they were taking this "home selling business".

I walked into the kitchen and lying on the counter were the flyers. $710,000. No wonder it was sitting here. It's a $630-650,000 market if the house is in good shape - meaning fresh paint, new carpet/refinished hardwood floors and some upgrading.

The kitchen was livable but, judging by the grey tile counters, the last remodel was probably done in the 80s. As I walked through the house my mind wandered back to the songs of Bon Jovi and Mr. Big. I was twenty pounds lighter and Aaron was in elementary school then. The oak trim and gold detail almost had me in a rash. The coup de gras was the bright red floral wallpaper in the master bedroom. I enjoyed the 80s a lot but, the market for folks trying to relive the 80s is pretty miniscule.

I took a deep breath of relief and fresh air as I walked back to my car. I always wonder if there is something I can do to help folks. I am sure these folks are decent people and just want to get the best offer on their house.

If they spent $30-$50,000 they could get their close to their $710,000 asking price. Otherwise, they need to drop their price pretty close to $100,000.

Assuming I could talk with them, I wonder if I would have the patience and skills to help these people position their house to sell or if they would just keep singing Bon Jovi's "Come Back".