Buying Real Estate in the Aftermath of the 'Perfect Storm'

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Includes: EQR, TOL
by: Investment U

by Dr. Mark Skousen

Buying real estate? Are you nuts?

Investment U Chairman Alex Green thinks so, what with foreclosures skyrocketing and prices in some places falling more than half from their peak. He says the market is “dead” for now.

But dead doesn’t mean unprofitable. And as Baron Rothschild often said, “Buy when blood is running in the streets.”

Despite all the bad news making the front pages, real estate-related stocks and funds have been making a comeback; some are up more than 25%, suggesting light at the end of a very dark tunnel.

Equity Residential Properties (NYSE:EQR), one of my favorite REITs, is up 20%. Toll Brothers (NYSE:TOL) - builder of high-end homes - has been volatile, but appears to be bottoming.

My basic argument for a turnaround is that the federal government has essentially put a floor under the current real estate market, buying up the bad mortgages, offering incredible incentives including tax credits, and with prices down sharply, the bargains are everywhere.

Buying Real Estate At Bargain Prices

I just completed a survey of property and real estate experts in the hardest hit markets in the country - California, Nevada, Arizona and Florida - and, surprisingly, most experts expressed cautious optimism about rental properties and bargain real estate opportunities.

None were bold enough to announce that the bottom had been reached in housing prices. Most predicted lower prices in the next six months. However, aggressive speculators are finding profitable investments.

I spoke with a vulture capitalist who has put together a syndicate to buy up foreclosed single-family homes in Southern California. Another one is involved in condo developments, which have been hard hit in the region.

His group is going to market with a condo project in North Hollywood:

“We have started to see some serious pickup in home and condo purchase activity all around us,” he told me. The tax credits for first time homebuyers and the dramatic drop in interest rates seem to have caused a positive reaction. His gut feeling is that prices are not going to be dropping further in the urban areas.

Prices of homes and rents are declining in Las Vegas - home values are down 40% to 50% from a year ago, and the majority of housing and condo sales are foreclosures. Real estate sales are picking up, but almost all below market prices.

In fact, some speculators are getting back to “flipping houses” - they buy way below the appraised value, add several thousand dollars in fixing up the house with new carpet and paint, and sell for $10,000 to $15,000 more - still below appraised value.

In Utah, a friend of mine is negotiating on a foreclosed house that has a $2.8 million defaulted loan. He expects to pay close to $500,000 for that property.

It’s the aftermath of the “Perfect Storm” of the real estate bubble:

  • Super low prices
  • A locked-in 4.75% fixed 30-year mortgage rate
  • An $8,000 (refundable) tax credit that can be applied to a 2008 return and never needs to be repaid. (It applies to first time buyers or those who haven’t owned a home for three years.)

Buying Real Estate Around the Country

These events are all lining up for real estate investors interested in buying real estate around the country: .

  • In Arizona, a friend is looking at a dozen homes in the Anthem Country Club near Scottsdale that used to sell for $400,000 or more two years ago. Now they are for sale or held by the bank for under $200,000 and one three-bedroom/two-bath home is going for $129,000.
  • In Florida, longtime real estate expert and investor John Schaub has bought six rental houses in the last six months. According to John, he can get better than an 8% net cash flow even with today’s lower rents. These houses are typically bank owned. Not every bank will sell at a bargain price, but a number who are in trouble will - and today they are.

For example, he just bought a house that sold for $190,000 two years ago and had a $150,000 loan balance. John paid $62,000 and it will rent for $895 a month. The net rent after all expenses would be more than $6,000 a year, or nearly 10% on cash return.

To get a great price, Schaub pays in cash and takes properties in “as is” condition. Banks don’t want to warrant anything so a buyer must carefully inspect any purchase. “All cash” offers will often trump higher offers from buyers who require financing.

John has a great book called “Building Wealth Buying Foreclosures.” I’ve found it an invaluable resource.

He believes this super buying real estate opportunity will last through the next couple of quarters:

  • New inventory is shrinking fast and many banks are now renegotiating existing loans, rather than foreclosing.
  • Buyers are recognizing that we are near a bottom, and incentives like the tax credit are beginning to enter the market.
  • We’re going to see rentals increasing as profitable and attractive investments. A wave of homebuyers who can’t qualify for loans or who’ve been foreclosed upon will begin to put pressure on the rental market by year’s end.
  • Rising rents will be a further inducement for fence sitters to begin buying.

And in a few short years we may look back upon the incredibly beat up real estate sector and see it as one of the greatest buying opportunities of the century.

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