Housing boon: Investors seek guilt-free gain in crisis

Properties like this one on Carlton Road are available on the cheap through foreclosure auctions. But plummeting home prices mean that there's another option that's easier on both the debtor and still offers a good deal to the buyer.

"Take advantage of opportunities to purchase properties from banks below market value!" said the ad in the Daily Progress. The event, scheduled for three nights in mid-February, was billed as a free way to learn how to do property deals in a stressed-out economy.

With housing prices plummeting and more and more Americans unable to make their mortgage payments, the "buy low-sell high" principle of investment says now is the time to purchase real estate on the cheap, and real estate agent Anthony McGhee has two simple words: "short sale."

"It's an option almost nobody knows about," says McGhee, a Ruckersville-based agent, "and it's a win for the bank because they don't want to own it, a win for the debtor because it doesn't count against their credit score, and a win for the home-buyer because they get a good deal."

McGhee, who works under Assist-2-Sell discount brokerage banner, was hoping to educate potential home-buyers about with his seminars. On February 10, the first of his three-night stand at the Hilton Garden Inn, a total of seven showed up.

Four indicated they were looking to buy real estate as an investment, and three were real estate agents who were admittedly unaware of this relatively new phenomenon.

"A short sale," explained McGhee, "is when someone owes more on the house than the house is actually worth. This used to be rare, especially here, but once housing prices started to go down, we started to see this more and more."

So rather than foreclose on the house altogether–- and likely have to take on a non-performing asset when it doesn't sell at auction–- banks are now willing to work with home-buyers who want to take the property off their hands before a foreclosure auction, even if it means taking a loss in the tens of thousands. There's just one qualifier.

"Usually, the homeowner has to present a hardship letter," said McGhee. "This means you have to show them that the homeowner isn't making their payments because they lost their job, and that means pay-stubs, bank statements, and so on."

Still, it's not as though the banks are eager to jump at this prospect.

"You have to contact the homeowner first and then work with the homeowner's lender to get them to send you a 'short sales packet,'" said McGhee, "and for every 10 calls you make to them through the process, you might get one back. So be prepared to wait."

Nevertheless, it's supposed to be a more humane prospect for the person getting foreclosed upon, and McGhee says if only more homeowners behind on their payments knew about this option, they could save themselves a credit hit. In other words, the homeowner still loses their house, but they keep their credit score. And the buyer, theoretically, gets a deal.

"If the bank accepts your deal, they will cover the difference," said McGhee, "and the transaction will show up on their credit report as having been paid in full."

McGhee says it's a shame that more people facing foreclosure don't know about this option, and that if they're willing to wade through the voluminous paper work, they can save themselves the heartache of debt collection.

"Most people are just tired, and they're ready to hand over the keys to the bank," McGhee told the audience. "I met with a woman who literally had Kleenex on the kitchen table because the bank told her she needed $13,000 or she was going to get foreclosed on. I looked through her papers, and it turned out she'd lost her job, and she would probably qualify for this."

The prospect of stepping in on these deals without stepping on the backs of those less fortunate is one thing that drew landlord and tennis instructor William Raymond, who drove from Richmond to hear the talk.

"As long as people have been honest with their lenders, this is the best deal they can make," says Raymond. "These are astronomically good deals out there right now, and the only people who are losing are the people on the sidelines."


The days of "buy low, sell high" are over in the Cville area as they are in the rest of the US. But a buyer who is looking for a "good deal" and plans to stay put for at least five years may find that making an offer on a Short Sale is the way to go. As with any house sale, however, the Asking Price is just a suggestion.

In this area, the median price of a home has risen more than 70% since 2002, according to the local Realtors' association. This is obviously not "real" gains. It's the result of easy credit and the false notion that "housing values always go up!" And the old idea that "Charlottesville is a protected market," meaning that what happens in the rest of the state or country doesn't impact us here in Nirvana. Obviously, not true.

There is a LARGE (3,400+) supply of homes, condos, townhouses available in this area (Central VA) right now; at the current slow rate of sales, about THREE YEAR'S worth. Sure, it's winter, but there's been an oversupply for nearly two years. Builders are going under right and left, as readers know from The Hook's reporting. The real estate market here is essentially frozen, and it's not because there's snow on the ground.

Many current owners overpaid in the past seven years and now unfortunately will take a loss if they have to sell. Asking prices in this area have only recently begun to reflect the "price correction" from the buyers' point of view. Asking Prices may drop further later in the Spring when sellers realize what buyers already know. Still, the market may remain painfully slow. The nation will remain troubled economically into 2010 (according to the Fed and Treasury Secretary) and the area's largest employers are having wage and hiring freezes, furloughs, and layoffs, so the pool of available buyers may further shrink.

Mr. McGhee is on to something: there will be more short sales and foreclosures, which will cause the area's housing market to adjust to the new reality. It will truly be a "buyer's market" for a long time to come.

For home owners who need to avoid foreclosure, the Obama Administration's Homeowner Affordability and Stability Plan may be able to help in reducing interest rates and monthly payments. This plan will not help those who cannot afford to make reasonable mortgage payments, or those who are unemployed, unfortunately. Details are available at the website for the Department of Housing and Urban Development, www.hud.gov, or contact the Piedmont Housing Alliance.

BTW, our blog has info on local, regional, and national housing issues, and the credit crisis and recession, as well as often lively discussions in the comments section.

Now is the best time to buy a second home and rent it out. If you buy a home for 200k and rent it out for 12k a year you will break even after taxe breaks (with 20k down and 6.5% note) and have positive cash flow soon enough. So now you will have a house that will appreciate as it pays for itself. all with 20k.

If you put 20k in the bank at 4% you will get 800 bucks a year (650 after taxes).

If you put 20k into a rentasl home you will pay off about the same in principal payments PLUS get the growth on the property. (which will be significant ten years from now. Probably at least 50% total.

If you keep it forever you will eventually have it paid off and keep the rents as income (which rise with inflation)plus have a house for your children to inherit.

There is currently a three year supply, but remember, there are hardly any bulders adding to the inventory and the population is increasing not decreasing all of which will add pressure and dry up the excess in a short period of time.

at 6.5% and 20 thousand down you still need private mortgage insurance until some equity is built up. plus city or county taxes and you're looking at a monthly mortgage payment of about $1460. you also need to have an umbrella insurance policy to cover your liability as a landlord about $100 a month. you also have to figure in maintenance and yard work. so if you rent the place out for 1000 a month this doesn't sound like a break even kind of situation for a long time. population in the city is decreasing according to recent stories in the daily progress, hook, cville weekly etc. maybe this will change after the recession. all the unsold houses are being turned into rentals so rents are on there way down around here for a while.

The other thing to consider as to why houses are a good deal now are to simply look at replacment costs. You cannot go out and build a house even being your own contractor for what you can buy one for. Add in the cost of hooking up utilities and permits etc and it is an even greater investment.

Ask anybody who bought a house in 2000 whether they regret it or not. So long as they didn't cash out refinance they are still sitting pretty.

Houses, viewed accurately, are not investment goods - they are consumption goods with residual value. If you're talking about rental properties this changes, of course, since you're not directly consuming the housing. But even now people should be careful about embarking on careers as landlords. There are many fixed costs that come along with landlording, all roughly describable as maintenance of and care for the property.

Historically the rent/price ratio has been around 5%. In other words it has usually cost 20x as much to buy as to rent. But in recent years, in "the bubble," we got down to 3.5% (more than 28x as much to buy as to rent).


That ratio should be the lodestar for anyone considering buying a rental property.