Thursday, October 12, 2006

Who are the Sellers?

There are several groups of people that have real estate inventory for sale, contractors, real estate brokers, flippers, home owners and banks.

Who's going to offer you the best price? The builder probably has the most leeway on price, next the bank repo, then the real estate broker (flipper), next the investor (flipper) and then the homeowner.

Builders tend to know the market and if they need to discount, it’s going to be real.

Banks offering repo's would theoretically have a 20% discount of the property to break even, if the loan was an 80/20. The second trust deed would drop off.

Real Estate Brokers especially if they are named “Stretch,” will be more eager to sell you their property. They’re going to give you a good price (hell you already told them your bottom line). Flipping is a realtor's second job (only a 3% commission to pay). There are a lot of realtors holding inventory at this time.

Investment flippers have two areas of concentration: condos and detached houses. The Condo market is between a wish and a prayer and the regular house market isn't doing much better for price appreciation.

The regular homeowners are dropping prices in $10,000 increments. They know the rudimentary fundamentals of selling, but they are only a “garage sale retailer.” It’s their price or it isn’t for sale. Can you imagine a super market offering hot dogs on sale regularly $3.95 now only $3.85? They mise well be glued to the shelf. They are not going to move.

So who is really selling houses? The answer has to be the contractor! The machine works very efficiently.

The contractor can finance through limited partnerships. If the land is bought at a reasonable price, the LLP investor can expect a 20 to 50 percent return on the investment. Even in the worst market you can imagine, the contractor can undercut the home owner. There is a limit to that, and it’s around $80 dollars per square foot. I could be a little off on that, my figures are about 6 years old. So when the houses start selling for $80 per square foot and condos for $30 per square foot, the contractors will melt into the sunset as they did in Detroit. Who gets the houses if they don’t sell? Most probably the bank. Who wants the houses at this price, only the uninformed (they're easy to spot; there is no newspaper in their driveway in the morning).

So what do we have? We have home owners wanting to move and sell their house. We have builders building more houses; there is a profit to be made. The supply is increasing, but why buy an old home when you can buy a brand new one? (Colorado is in this scenario right now, the contractors are still building and inventory is going through the roof, and prices are very reasonable).

As long as used housing prices are sticky going down in price, the contractor is going to eat the home seller’s lunch, and laugh all the way to the you-know-what. What makes it interesting is that the banks can play both ends. They loan to the contractor and to the homeowner.

So the banker says “Belly up to the bar, HELOC's for everyone, and if you need money to build, just tell me where to mail the check!”

Then you have the homeowner, he’s already spent the equity in the house, his world of dreams is now a nightmare. His wife is packing up and ready to leave him.

The typical buyer is not going to buy that used house; they’re going to buy a brand new one from that contractor down the street.

The contractor is going to keep on building until housing prices drop to where he has no profit margin. His profits will tend to be real profits. On the other hand, the homeowner's prices tend to be from some dream hoping for a sense of reality. Equity created out of nothing.

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