Home Prices Decline For First Time In 11 Years

I'm sure you've all read the articles that appeared on Monday that said, for the first time in 11 years, existing home prices fell. (If you didn't, you can read about it here and here.)

What struck me about these articles is the different views the so-called "experts" have. In the first article, we have this:

"This is the price correction we've been expecting," Lereah said. "With sales stabilizing, we should go back to positive price growth early next year."

In the second article, we have this:

At the end of August, there were so many unsold homes on the market that it would take seven and a half months to sell them all at the current sales pace. The association said that was the biggest backlog since April 1993.

What's even more confusing is that the two pieces of information come from basically the same source. David Lereah is the chief economist for the Realtors Association and the second quote comes from the Realtors Association itself. So if there is still seven and a half months of backlogged inventory, that means it will be at least mid-April before we're back to normal inventory levels. As any first year economics student can tell you, surplus inventory means less demand and less demand means lower prices. I think Lereah is being overly-optimitic.

And all this does not even begin to take into account the uptick of foreclosures and mortgage defaults that will be happening as variable rate mortgages start to adjust upwards, something we're already seeing the first signs of now.

I know one thing from experience: when people start prediciting a market has hit bottom, it hasn't.

So what does this mean for a real estate investor? As long as you know the basic rules of REI and stick to them, you should be ok. The most important one is that money is made when you buy a property, not when you sell. Don't buy something that is losing money and expect appreciation or tax savings to bail you out. Become more selective in your purchase criteria. It is becoming a buyer's market, so take advantage of that.

Market Flushes Out The Not-So-Serious

Yesterday afternoon, I had a guy over to give me an estimate on cleaning my carpets. He was the owner of the carpet cleaning company and we got to talking and it turns out he used to invest in real estate. When I told him I had sold my rental a while ago, he said "So you got out while you could, huh?", referring to the recent market slowdown. Well, no, I got out because it made sense to me at the time.

He went on to tell me that he had 9 houses at one point. He was flipping properties using 100% financing (bank loans, not hard money). He's got one property left that he's got rented on a lease option, He owes $750,000 and said it just appraised for $725,000. That's not good - especially if his lease option contract states the sales price will be the appraised value (which I have seen a lot of contracts specify).

I didn't bother to tell him that I was still working real estate. It was obvious to me that he was one of the ones who made a quick buck in the real estate boom and was now leaving the party as things slow down. His strategy seemed to be "buy and pray for appreciation." During the boom, this worked, but nowadays, it won't.

All in all, I'm glad to see people like him leaving the real estate investment arena. It's less competition for me and it will help the market return to "normal" valuations. This is apparently happening across the state, as I got a call yesterday from my Realtor informing me that her husband (who is part owner of buyazforeclosures.com, a company that buys and sells foreclosures) is getting back into the property wholesaling business because spreads, the difference between what a house can be bought for and what it is worth, are getting bigger now.

A Little Of This, A Little Of That

Not too much has been going on with me and real estate lately. I've made the decision to invest some money in my own house - finally. We've been living there for three years now and still have temporary paper blinds on some windows! So we're in the process of getting in-ceiling speakers installed (the house is pre-wired for surround sound and the cables are sticking out of the ceiling on big nails), having an entertainment center built, and a new fireplace mantle installed. Much of this won't happen until after the first of the year, but we have to set things in motion now. The good news is that we no longer have a car payment (got that paid off last month), so the money that was going towards that will be put towards these improvements and / or savings. I'm also still getting passive cashflow from my commercial investment and I got word on Friday that this month's payment has been mailed. I'm also due for two payments this month from some other foreclosure investment LLCs I'm in, so September is looking good from a cashflow perspective. And, of course, I'm still putting 15% of our paychecks in savings for future investment opportunities.

I got word from my investors that they'd like to talk with me before I start working on another property. They have no problems with my performance, but I think they are a bit worried about the housing market and don't want to get caught in a collapse. It's probably just a case of getting worked up from the doom and gloom media reports that you see almost daily about the collapse of the housing market. As I've always said, as long as you buy correctly, you should be safe. Hopefully, I'll talk with them in a week or two.

I'm still getting calls occasionally from people who want to sell their house. Since I haven't met with my investors yet, I can't help them, so I've been referring them to another investor I know. I got an email from him the other day saying thanks for the referrals and if any of them work out, he'd pay me a referral fee. That's nice, especially since I didn't ask for one!

I also ordered my free annual credit report from Equifax to make sure there were no errors. I was pleasantly surprised to find there were none! I think this is the first time I have gotten a credit report with no errors! Of course, Equifax had some errors in the past that I had to have them correct, but at least those corrections were made and no new ones were introduced. Still waiting to receive my wife's credit report. Hopefully, it will be as error free as mine.

Builders Are Practically Giving Away Homes!

Well, not really, but I did see an amazing offer last weekend. I have some relatives who are looking to move to Arizona from California and they were out here last weekend to look at houses. They looked at some resales, but also looked at one new build development. The house they liked was the biggest in the development, about 2,300 square feet. It was priced at $395,000, but the builder was offering an $85,000 incentive. With that incentive, the house was actually cheaper than their smallest model. In looking at their community map, it seems pretty clear why they are offering such a big incentive. Very few of this model have been sold. They probably want some diversity in their community, so they are trying to sell this particular model so the neighborhood has some variety. Oh, and another incentive they were offering was free granite countertops.

I also found out an interesting bit of info from the salesperson. This particular model is a two story house and, when discussing the various lots available, she told us that the city of Chandler does not allow two story homes on a corner lot. I've never heard of that and I can't really think of a reason why they would have this restriction. The only thing I can think of would be visibility, but you can instead have required setbacks from the street for the house. Does anyone have any other ideas?

AZ Republic Article On Teaching Sellers

Brian over at How To Invest In Real Estate posted a story from the Arizona Republic about how sellers are basically clueless about the current real estate slowdown and are still looking to sell their homes for the inflated prices of the last two years. Realtors are having to educate them on the current market dynamics and find ways to make them realize they may need to lower their price, not once, but several times.

But one line in the article really jumped out at me and made me question the knowledge of most Realtors:

You can't count on city or town medians or appraisals but have to look at what comparable homes in the neighborhood are selling for, they said.

No shit.

As a real estate investor, this is the first thing that was drilled into my head. It should be the most self-evident statement ever to anyone remotely involved in real estate, yet at this meeting of 200 members of the Southeast Valley Association of Realtors, they had to specifically point this out.

And these are supposed to be real estate "professionals".

Another Prosper.com Update

I've already mentioned I've grown disappointed with Prosper.com and will not be lending any more money through there. I've noticed now that they have added a new feature called "Community Payment" which I'm not sure I like. The concept is simple: if a member of a group is behind on payments, other group members can chip in and make a payment on the overdue loan. This helps keep the group's rating up by cutting down on the number of late loans the group has, which can scare away other lenders from that group.

As a lender, I should be glad for this. If the borrower can't pay me, at least someone else will. In fact, this has just happened. One of my loans is 2 months late and I received a community payment. The amount was only $1.43 and after all the late fees and service fees, I only get $0.21, which is still better than nothing (although not by much).

But on another level, I am against this idea. The point of Prosper, I think, is for people to help other people get back on their feet by lending them money. But part of getting back on your feet means learning and accepting fiscal responsibility. The community payment option gives borrowers less of a reason to accept that responsibility. I think it is also a huge source for potential abuse. If you find a group whose members tend to make community payments for others, why not join that group, borrow money, and default on the loan? The community payments will stretch out even further the amount of time it takes for a loan to go to the collection agency and thus, hurt your credit score.

First Payment From Commercial Project Received

I received my first payment yesterday from the large commercial project in Louisiana I invested in recently. Also had an update on the progress from the property owners. They have hired a new property management company and that company is actually moving into the building, which is a plus. This company managed the building for over a decade before the previous owner took over and had the property at 80% occupancy. They are currently at 40%, but they feel they can get it up to 80%. On the bad news front, three air conditioning units went out and they will cost the owner $30,000 to repair.


In looking at my last post on this topic, I realized I forgot to mention one important fact: My ROI on this investment is infinite! Yes, I am getting a 12% return, but the money I put into this project came from a line of credit that is costing me 7%. I get each payment, use some to make my line of credit payment, and pocket the rest. While it looks like this means I am actually making 5% on my money, I am not. Because none of the money generating the income is my money, I have zero dollars in the deal. This means I am getting money each month with none of my money invested, which gives a return on investment figure of infinity! Of course, there is some risk involved in this and I do have reserves set aside in case things go south, but it's hard to beat an infinite return!