Tuesday, July 25, 2006

Buying a Forclosure

Back in 1997 I started selling real estate in Vista, California. I specialized in selling VA Repo's to investors. Condos went from 28k to 65k, and houses were going from 71k up to about 165k.

The VA repo is a special animal. You don't have to be a Veteran to qualify for VA financing, and if you were an investor it was 20% down. That was 10k down on a 50k condo that would rent for $800/month. You only needed to write a check for 1K in order to bid. If your bid was the winner, they cashed your check. Otherwise it was returned to you uncashed.

Owner occupied was 10% down. Either way, the real estate agent got both sides of the sale, the full 6%. It was deducted from the sales price of the house and from the resulting assumable loan amount.

A buyer of mine who had a bankruptcy, two divorces, child support, a separation in progress. Won the bid on one of these and qualified for VA financing. We low balled the house Christmas weekend and from what I can guess, we must have been the only bidder.

All of this was happening back after the slump in 1996. It wasn't uncommon to see 20 Repos each week for my area. Condos that they gave away for 28k in 1997 are now selling for 220k--800 sq ft 1 &1/2 baths. By the year 2000 the VA Repo market dried up and I got out of real estate.

Now we are into 2006 and the real estate inventory is still climbing. I notice a lot of forums discussing how to buy foreclosures and REO's. It strikes me as a little absurd to be looking for a deal so close to the top of the market. It s probably going to take about 4 years for the market to become attractive to the investor.

As an investment guide, multiply the monthly rent times 100 and that gives you a purchase price that will provide an excellent return. Right now, we are not even within driving distance of such a concept.

Like I've mentioned before, while studying the last great depression (circa 1929), I couldn't figure out why almost every homeowner had a 5 year interest only renewable loan (I'll bet you thought this was a new banking concept). When the money supply dried up, the loans were not renewed, they were called for payment. From there the banking collapse got worse. I don't think that Congress ever passed a law against interest only loans, the banks just refused to write them after that.

Today, the news is citing a 25% drop in housing sales from June of last year. What happens when it jumps to 50%? My guess, not much. The homeowner can't sell his house so he had better keep his job and hold tight.

At some point between the 25% drop and 50% drop, unemployment has got to increase. And to repeat myself, this meltdown is not going to be a one item (real estate) event. Financial loan markets, real estate, banks, mutual funds and the stock market are all intertwined.

To sum it up, I still have a current real estate license. I am waiting for when the VA Repo lists drop about 80% in price, and I'll be out there bidding---when the price is right.


Anonymous said...

EXCELLENT!!! Please continue to post more of these...

Anonymous said...

Hey Jim,
It's been a year, give us an update on this stuff! How long before there are real auctions on houses?