Friday
May 21, 2010

I was speaking to a client the other day who recently purchased a foreclosed condo as an investment. And while there are many good bargains to be found in the the condo market, I would be very, very cautious about purchasing a condo today – whether for investment or otherwise. Here’s why:

When you purchase a condo, not only are you buying your particular piece of property, you are buying into the financial condition of the entire association.  When a unit owner goes into foreclosure, they not only quit making their mortgage payments, they typically also quit paying their assessments. And while the association has some legal recourse to collect past due asssessments, that entails a lengthy legal process – and the accompanying fees that go with it. Even so, the association lines up with other creditors for payment and may have limited success in ever retreiving monies owed. In the meantime, it falls on the other unit owners to pick up the budget short-fall. It  can work an undue hardship - particularly in a small association.

The condo market has been particularly hard hit with foreclosures. This only makes sense. Condos are typically how first time buyers enter the real estate arena and first time buyers have been the hardest hit in this down turn. Also, because condos are how many first time buyers enter the real estate market, they were the hottest commodity in the boom – ergo the hardest hit in the bust. Many condo developers came to market with new projects just before or as the market began to turn. It is pretty easy to find bust condo developments today where only a small percentage of units were ever sold. These developments are typically not mortgagable.

In the situation of a bust condo development, the developer often resorts to renting out unsold but finished units. However, when the owner occupancy ratio falls below 65% or 70%, lenders will not make loans against that property. Individuals that DID buy into the association are literally stuck with an unmortgagable – hence an unsaleable - unit. They are not even able to refinance their existing loan to take advantage of current low interest rates thereby reducing their monthly payments.  

And so begins the downward spiral…

I am involved in a transaction right now where my buyer is exploring purchasing a unit in a bust condo development. The developer was unable to sell enough units to satisfy his loans -  and so ended up giving his unsold units back to the lender. Of the original 60 units, 35 of them are now REO’s. (Just imagine what the 25 individual owners who did buy have had to endure these past 2 years while the foreclosure was in process!) Most of the 35 units were only finished to the point of drywalling. It is  up to the new individual purchasers to put in their kitchen, baths, interior trim - including flooring, etc. Most lenders will not lend against an unfinished, uninhabitable property. The bank that took back the units is doing the financing themselves – rolling the cost of completing the units into a final end mortgage. They really have no choice if they want to sell units to anyone other than a cash buyer – at an even more deeply discounted price then they are currently selling them. The appeal to my buyer is that he has the wherewithal – both financially and otherwise – to complete the unit. He will be able to purchase a unit that originally was selling in the low $400,000’s for half of that. As a long-term hold, he will probably do very well, although it is a gamble. However, he is committed to the long term ‘work out’.

I am NOT saying don’t invest in foreclosed condos.  Just make sure you are extra cautious about your due diligence. You want to go into your purchase with eyes wide open. and know what you are actually buying into. If you need help or have more questions, just give me a call. I would be happy to help you as best I’m able. You can reach me at 888-834-7085 (toll free) or by email at mnack@mnack.com

“To Your Success!
mary!

Wednesday
May 19th, 2010

A couple of weeks ago, I received a phone call from a prospective seller. She owns a property that has been sitting vacant for quite some time. She has been trying to sell the property herself but to no avail. In the meantime, the city is threatening to condemn the building unless she repairs it – which she is unable/unwilling to do. So, the building is a tear-down and all she really has to sell is a vacant lot.

Listening to this story, I bluntly told her that, sadly, her property was only worth the price of vacant land. In fact, whoever buys it will also be faced with approximately $25,000 in demolition costs – so it is worth even less! Naturally, this did not make her happy.  She is not willing to sell the parcel for the price of vacant land.

I then asked if she had considered developing the lot: tear the existing structure down and build condos which would then sell. Some quick research showed that new construction condos are still selling very well in this location – even in this economy! Her reply was that she wouldn’t even know where to begin or how. So I proposed perhaps she could partner with a builder. She contributes the land, the builder contributes everything else. When the condos are sold, everyone gets paid back what they have contributed and then share in the profits.

She thought this sounded like a good idea. So I proceeded to put out some feelers to see if there were any builders interested in such an arrangement. Well! I had 3-4 different builders very much interested! So I began arranging meetings for her to meet the builders and explore a possible partnership.

Once the idea looked like it might actually happen, she became nervous. How was this going to work? She wanted to know if she was going to have to come up with money up front? Naturally, she had a million questions  - which was the point of the meetings: to explore the possibilities. Finally, the morning we were to meet, she called me and said,

“I don’t want to meet with any builders. I just want the builders to buy the building from me. I am willing to accept $450,000.”

(Now, mind you, this was a big drop in price. Previously, she had been asking $650,000 for the property! Which explains why she hadn’t been able to sell it.)

Me: “But the lot is only worth (maybe) $150,000 – max! No one will pay you $450,000 for a building that needs to be torn down!”

Seller: “No – I don’t care. If they will pay me $450,000, then I will sell it. Otherwise, I am not interested.”

BAM! Door shut. End of conversation.

Her attitude is a mystery to me. By doing what I am proposing, she would put something like $350,000 in her pocket – after expenses and closing costs! – for a property that is worth MAYBE $150,000 (and I think that is already pushing it). In essence, my solution creates an additional $200,000 for her!

But it’s easier and simpler to live with the fantasy that your $150,000 parcel will someday bring you $450,000. I noticed yesterday that there is another realtor’s For Sale sign on the property. And what is it listed for? Yup, you guessed it: $450,000…

“All Things With Exuberance!”
mary!

I am a big Robert Kiyosaki fan ( of “Rich Dad, Poor Dad” fame). One of the things Kiyosaki really harps on is that – rather than focus on income (i.e. getting a job, a salary, etc), focus instead on acquiring assets that will generate income. He says that if you invest in things that produce cash flow (income), then you don’t need to worry about what the value of the asset is doing. SO TRUE!!
 
The one asset that I have been able to keep through the ups and downs of this economy has been my parking space downtown. I bought it through my retirement plan in Dec ‘03.  I had a mutual fund that I cashed in and I used the money to buy the parking spot. The mutual fund had done pretty well – it was heavy in technology stocks and technology had done very well while I owned it. But technology crashed and so did my fund – so I decided it was time to do something different with it. Now I own a parking space free and clear through a self-directed SEP-IRA.

I wish I had bought a few more spaces!! It is been such a great investment! Even in this economy, it’s worth about 50% more than what I paid for it. I’ve had it for a little more than 6 years. Not a bad ROI - particularly when you consider that most people’s real estate is DOWN 25% – 30% in that time frame! Now, mind you, there’s no chance of retiring on the income. However, I’ve kept about 1/2 the rent checks this past year instead of putting them back into the fund to help out with my OTHER negative cash flow areas. (I like to keep a buffer in the fund to cover expenses in case I sit empty without a tenant for awhile.) 

About 2 years ago, because of the poor market and resulting losses in my brokerage business, I decided to convert the asset from a conventional IRA to a ROTH IRA. That sucked up my cash reserves. I had to pay a 10% penalty to withdraw the asset out of the conventional ROTH. However, I ended up getting all that money back (as I said, due to the heavy losses in my brokerage business.) And what’s WAY cool is I was able to do all that just from the income that the space generated. And now, with the conversion to a ROTH IRA, I have an asset that I can eventually sell or withdraw income from and not owe any taxes on! So I am very pleased with that outcome! 

In “Rich Dad, Poor Dad”, Kiyosaki said that your home is a liability. At the time (10 years ago?), it seemed to be quite an outrageous statement. People were quite upset about it (including me). He’s not against people owning their home – he just says that people are confused if they think their home is an asset. Your home is a place to LIVE. A home doesn’t generate income the way my parking space does - it generates EXPENSES! Well, with 10 years’ of hindsight, it’s pretty clear that Kiyosaki wasn’t so crazy. That’s why people are losing their homes - they can’t afford to meet the expenses of owning it!! Now – granted – you have to spend money to live SOMEWHERE…it may as well be in something that you own. But to think of something that costs money rather than pays you money as an asset… well, Kiyosaki would say that you don’t understand the definition of “asset”.

In one of Kiyosaki’s lastest books: ”Conspiracy of the Rich”, he compares his lifestyle with that of a high school buddy. The buddy and his wife have high paying jobs and good salaries. They focused on generating income through having good jobs. Instead, Kiyosaki and his wife focused on generating income through owning assets that create cash flow (i.e. income). And 30 – 40 years later, they are sitting in very different places. Kiyosaki went through some rough patches to get to where he is – but today, he is financially free. He doesn’t need to worry about retirement or losing his job or not having income. He is set for life – and beyond! When I read that, my thought was:

“I need to start figuring out ways I can generate more income-producing assets like my parking space!”

One final Kiyosaki thought: this can either be the best of times or the worst of times. How you approach it and what you do about it is what will determine which one it is for you. From my perspective of being in real estate for 30 years, I have not seen a better time to buy income-producing assets. These are not just limited to real estate – that just happens to be the one I know the most about. Let me know if I can be of help! 

“To Your Success!”
mary!

For more information on how you can profit from the current real estate market, download my free report now! >>>>>

Asked by A. Martinez – A  Home Seller In Chicago:

“I own multiple properties and two of them were cited with violations such as the need to replace the porch in both buildings and a possible deconversion. These repairs will be way too costly for me and may not be a able to afford the repairs and possible deconversion. What are my options?”