Real Estate Ramblings: Free Houses

When the real estate market hits bottom, free houses will be available. Mark my words. You heard it here first. But more on this later on in the article. First, some background info.

I have invested in real estate for over twenty five years, including single family residential, multi-family residential, commercial, apartment professional offices, shared ownership, an island, and even gold mining claims (which aren’t technically real estate unless they are patented). About the only type I haven't invested in is condos. As I've written about previously, this is the worst real estate market I've ever seen and I predicted that it will continue to get worse.

I remember when I tried to refinance many years ago, the loan broker told me that I needed to get some fake tax returns showing a high income in order to get the loan. She said that everyone did it, that she did it and her boss did it. I didn't do it, of course, but it makes me realize that the mortgage companies these days made it so borrowers didn't have to fudge their returns. They created something called a "stated income loan", which means that you state on the application whatever the income you need to qualify for the loan (technically it is supposed to be the income that you really make) without any documentation. What were these banks and mortgage companies thinking? Besides that, they were offering 100% loans with no down payment. What were they doing?

There used to be a loan called a "no doc" loan which required no documentation, but I was told that "no-docs are for doctors – people who don't really need a loan, people who put down 50% when they buy a home." Now the no-docs are not just for docs, but for everyone. A couple years ago, I was riding BART (Bay Area Rapid Transit) and overheard two mortgage brokers talking about their business. One said to the other "I'm now giving loans to homeless people," At the time, I thought he was being facetious; now I'm not so sure.

Back on March 13, I predicted that there would be real estate "blood in the streets". We are just starting to see some of the blood starting to flow. I know half a dozen people who are going through or have gone through foreclosure, one of whom had his home sold (that is, an attempted sale) on the courthouse steps last week. If you really want to know how bad the real estate market is, talk to some of these people. Over the last few months, governmental representatives were interviewed on the radio and television, saying that "lenders are willing to work with you if you have trouble making your mortgage payments. Give them a call right away before you get too far behind in your payments." This is total rubbish and BS! You know what they said to these borrowers? "Why don't you try refinancing with another lender?" and "Why don't you try selling the house?" Is that what they call working with you? Has there ever been a situation recently where the lender has helped out a borrower who couldn't make the payments? I haven't seen anything in the news about a lender helping out, and if they did, it would certainly be news.

You want to know another reason why I think the real estate market is so bad? I live in an upper-middle class upscale town where houses sell for $700,000 to $1,000,000. Almost every day, I drive past a house that looks abandoned, with weeds literally over five feet high growing in the front yard. It has been that way for over a year with no sign of any occupants. It is located two blocks from the middle school and two and a half blocks from the elementary school. I thought to myself, if I could pick that up for $300,000, I could get some landscapers and painter in there, and flip the house for $600,000, about $100,000 below "market" for a quick sale. Even if there were electrical and plumbing problems, there would still be a huge profit potential. So I decided to check it out on the Internet.

It turns out that a foreclosure sale had already taken place back in June, for a $221,000 minimum bid and no bidders! If I thought it was a bargain at 300k and the house didn't even sell for 221k, unless the house was on a toxic waste dump, the market must really be in the tank. Where were the small contractors who would normally buy these properties to fix and sell as their own projects, or the flipper/investors? Are they that over-cautious? Are they that over-extended?

You will know that the real estate market has hit bottom when free houses will be offered. Of course, these won't be expensive Beverly Hills mansions; they will be small houses in bad shape that are located in run-down neighborhoods. Sorry investors, you won't be eligible. "Buyers" will have to agree to live in the homes for at least a year or two, and be able to prove that they can afford to pay the property taxes, insurance and maintenance on the houses.

What else are the banks, mortgage companies and other holders of the mortgages going to do? They aren't in the business of renting out real estate, nor are they in the business of even holding real estate. When they foreclose, they have to pay property tax, insurance, maintenance, and security. For that matter, they aren't even in the business of selling real estate. And buyers are still holding off.

When you see the free houses being offered, that will be the time to invest in real estate.

By Fred Fuld at Stockerblog.com