There is no question that I am one of the more dour of the Bloodhound gang; if we were the “seven dwarfs” I’m laying decent odds that I get tagged with the “Grumpy” moniker. And while I may, on occasion, revel in astonishment at the self-inflicted pain that the industry has kindly laid at our feet via the past 5 years of transgressions; I am in no way a fan of the current havoc buffeting our industry. I don’t like seeing people losing their jobs, their homes, their future plans – it’s not a pretty sight. But one thing I do like, is honest, important inspection of real estate and mortgage; and Greg Swann’s recent post on “You’ll Lose Money if You Buy a House? Which House?” reminded me of why I blog and what I believe we should all strive to achieve in one form or another through our blogging: cutting through the sound bites to get to the truth.
I believe that cavalier shibboleths are the primary cause of Realtor-focused ire on behalf of the disgruntled public. We’ve heard for too long that “Now is a great time to buy,” “Rates are dropping,” “It’s a buyer’s market,” and more that unfortunately to the everyday Joe just ring of hollow greed on the part of the real estate professional. And why do they ring of greed? It’s in the numbers stupid! It rings of greed because the main stream media is showing them graphs and charts and year-over-year figures that show real estate, as a whole, is a losing investment right now. They’re saturated with it. 6 months ago ask someone what the Case-Shiller Home Price Index was and you’d probably get a blank stare; ask today and you’ll probably hear about what the index is doing for that person’s MSA. This data dump has created a problem for real estate professionals.
The consumer is being fed numbers by the media on one hand and weak aphorisms by the RE machine on the other. The numbers, regardless of their flaws will win; because numbers have authority and sayings do not. In times of uncertainty people need something to hold on to, and a graph and a % sign are far easier to justify than a catchy slogan.
So what does this have to do with Greg Swann’s post? Well Greg articulately debunks Cramer by showing how the right property in the right neighborhood with the right potential upside return can still be a winner even in the overall loser that is currently West Coast real estate. How’d Greg do it? With the numbers stupid! Cramer talks in sound bites and generalities; Greg talks specifics to show how the general statement is flawed. From his post:
Don’t buy a home? Which home? A few weeks ago I was in a trashed house that was listed at $200,000 below market. We estimated that it need $50,000 to bring it back to turn-key condition, with a four-month span of time between purchase and resale. Even allowing for errors in our estimates, the house would net out to between 200% and 300% cash-on-cash return in one third of a year. Do that three times and $50,000 capital becomes as much as half-a-million dollars in a year’s time.
While these homes might be few and far between in the glut of the US housing market, they are out there; and they can only be found by navigating the market with an experienced RE sherpa. You just need someone to show how even with a declining sales market, there is room for positive return with the proper approach to purchasing the asset. Knowing things like the below market value, the carrying cost of holding the property, the rehabbing costs, and then the sales costs will help home buyers make informed decisions when purchasing that above home. Something they can’t get anywhere except from an experienced adviser. It’s cases like this property that crystallize the Realtor value proposition.
This is not rocket science, and it’s being done every day by the smart folks in our industry. My challenge to us all is to stop spouting shibboleths and to start using numbers to accomplish two things: 1. provide value to clients and 2. to show our expertise in the markets we service to those that may stumble across our online missives. Platitudes, truisms, and the like will not win business in a tough market; shrewd analysis of local markets on display will. We owe it to ourselves and our customers. For the people who are brave enough to enter the war zone that is the US housing market are surely doing so for a reason and with a keen eye; and are looking for good people who can navigate them through the mine field.
Benjamin Bach says:
Great post Morgan!
I was speaking with a client this morning about the ‘softening’ of some markets, and he said ‘well, doesn’t that mean my rentals will be more in demand?’ BINGO!
There is opportunity to profit in any market – up, down or sideways.
October 7, 2007 — 11:53 am
Greg Swann says:
Thanks, Morgan. A particular niche where a strategy like this can work right now, even in slow markets, is with unappealing homes in high-demand neighborhoods. And because money is so hard to come by, here’s a further elaboration: Make the current owner a partner in the flip, selling the property after the remodel. Now we don’t have to talk the seller down on price, we just have to agree on a basis number to use for calculating the value added by remodeling. After that, all we need is hard-money for the actual remodeling. If you can’t do your own work — and your time is probably better spent finding still more opportunities — you could end up with a partnership structure like this:
When you sell, the split each of you takes will be smaller, but the exposure of each partner is also smaller. With multiple work and finance partners, one executive partner could set up a dozen of these a year, while still listing and selling real estate. Every other partner in this structure needs the deal-maker to find the opportunities, so everyone comes out ahead.
If the homeowner has decent equity, he could use a HELOC to serve as the finance partner. He would then be absorbing all the financial risk, but he would reap half the profits while doing none of the work. In that circumstance, vendors like kitchen and bathroom contractors may be willing to do no-interest deals, billing into escrow against a mechanic’s lien. The point is to find ways of doing more and more work with less and less actual out-of-pocket cash.
Here’s an even further elaboration: Find a run-down neighborhood that could be made great with a concerted effort. Option four or five of the best opportunities and go to work with multiple partnerships. As work proceeds, work with the other owners in the neighborhood to do what they can with their homes, perhaps with the assistance of your originator, hard-money and contractor friends. A strategy like this could outperform a single flip, since the whole neighborhood would gain value in lock-step. Invent a hip name and do some PR and you could double the value of the homes in a year’s time.
This is some of the thinking we’re doing as we plan our way out of this market. I’m convinced there is a ton of money to be made by being the better home — either as a staged listing or a fix-n-flip — even when homes aren’t selling very well.
October 7, 2007 — 11:55 am
Benjamin Bach says:
Greg thats a very cool idea. I’m going to try to put a JV like this together – rehabber and owner, on the same page !
– Ben The Wealth Building Guy
October 7, 2007 — 12:10 pm
Greg Swann says:
Here’s more, Benjamin: Many of the people you will end up talking to will be elderly, either widowed or just overwhelmed by deferred maintenance. They need your help making the next move, so you stand to do well by doing good that way, too.
It broke my heart during our recent boom that so many older people missed their chance to cash out at the top and then buy in much-lower-priced 55+ communities.
But, whatever the seller’s age, deals come to deal-makers.
October 7, 2007 — 12:34 pm
Benjamin Bach says:
I think what I love most about this idea is that it’s a win-win-win situation for all involved, and helps revitalize the area.
October 7, 2007 — 12:36 pm
Morgan Brown says:
Obviously the key to this whole thing is an experienced and sage executive partner who can pick out the appropriate investment areas and properties based on financial modeling that can provide some type of stabilized return. To get 4 or 5 homes in a neighborhood at a discount is great; unless the builder across the street is slashing new development pricing by 40%. In that case the rehab effect on the price is a drop in the proverbial bucket.
October 7, 2007 — 12:39 pm
Benjamin Bach says:
Ahhh yes, “due dilligence.”
Always a must !
October 7, 2007 — 12:45 pm
Greg Swann says:
> I think what I love most about this idea is that it’s a win-win-win situation for all involved, and helps revitalize the area.
Indeed.
Wanna test your talents as a salesman? Talk a lender into taking the equity partner’s role for an REO property. Here’s the deal: “I can get you more money sooner if you can get your thumb out of your… mouth.” Probably wouldn’t work. But RELO companies are sitting on a ton of inventory, and they might be willing to make a deal.
October 7, 2007 — 1:06 pm
Rational expectations says:
Morgan Brown’s comments are right on target, but also belie the basic problem. Yes, there are opportunities for profitable sales in a down market, but as Brown points out these are “few and far between”. Declining sales and lagging prices are the dominant trend, something that cannot be missed by even those of limited faculties (such as, apparently, Mr. Cramer) and ordinary consumers. It is not the charts and graphs that are winning, it is what they reveal, and people understand.
Read Mr. Brown’s intelligent response to current media reaction and see that basically, the media has the larger picture right. Real estate jobs, like opportunities for profit under current conditions, will become “few and far between”.
Rational expectations
October 7, 2007 — 3:54 pm
Morgan Brown says:
Rational – You are right, the opportunities are few and far between. Consumers are bombarded with information which clearly shows that real estate in its pedestrian form is a poor choice in most instances.
The media (including Cramer) has the big picture right, and while his hysterics do make him look a little silly, he has been rather prescient in his meltdowns (see his “they have no idea” meltdown and subsequent fed easing of the fed discount and funds rate).
The point of my post was that the media has it mostly right, and it’s up to Realtors to find the exceptions to make their clients money and earn their commission.
Thanks for the comment.
October 7, 2007 — 4:01 pm