Lately, I have received several calls from distressed investors who are in a world of hurt. They are reaching out to anyone for any help of any kind. I listen, I sympathize and I console but for many I just don't have an answer for what they have gotten themselves into. It's very sad and some of these folks are heading into financial ruin. So many of these folks made real estate decisions during the 2004-2006 that looked like instant money back then. It's proving to be disastrous in 2008. Most all of the problems that I see deal with land deals in huge subdivisions.
If you are an investor or if you are considering becoming a real estate investor, here are some guidelines and points to ponder before you step into the deal of the century.
You live 800 miles away from a fantastic new subdivision being built in another state and one day you receive a very attractive brochure in the mailbox. It looks fantastic and if you visit, you get a free stay and meals for the weekend. Heck, if you register and pre-qualify they will fly you in for free also. Time for you and your honey to take a free mini-vacation.
No payments for 2 years. Sounds great doesn't it? You can buy a piece of property in a fantastic new subdivision with every amenity imaginable and you won't make any payments for 2 years. You have stumbled upon such a great deal that you may even buy 2 pieces of property. You may even tell your friends and encourage them to take a mini-vacation all expenses paid.
You are now the proud owner of a fantastic wooded corner lot in the most fantastic subdivision in the entire county. You are not going to make any payments for 2 years. Are you going to live there eventually? Heck no, you are going to flip that lot at the end of the 2 years and make a ton without hardly any money coming out of your pocket.
Let's fast forward. The 2 years are coming to an end and you receive notice that you are to assume the payments. Ouch! That's a lot of money getting ready to come out of your monthly budget. No problem, it's all part of your plan. Time to cash in... Ka-Ching. What do you do now? You call me of course because you found me on Active Rain. You are 800 miles away and for 2 years you didn't establish a working relationship with a local agent who has his finger on the pulse of the local market. You are not really sure what's been happening on the local scene.
You explain that you are ready to list your lot. You bought this fantastic piece of property 2 years ago for $225,000 and the payments are coming due. You can't really afford the payments because the economy has hit your family pretty hard also. It's time to sell and take your profits.
Here is the hard part. I have to inform this investor that there are 127 other lots for sale in the same subdivision. There have only been 4 lot sales in the last 6 months and the average sale price is $91,500. There have been 40 expired listings. Out of the 127 lots for sale, the average listing price is $147,500. Average days on market is 412 days. There is dead silence on the other end.
I get a call 3 weeks later from the same investor just to inform me that they had an appraisal done on the lot in an effort to re-finance and cut their monthly payment. The appraisal comes back at $115,000. The bank will not refinance. It's very sad. You are powerless to help. All you can do is to lend a sympathetic ear and just let them vent. For some it means financial ruin.
As an investor, you must keep in mind Economics 101. Supply and Demand. These investors bought into the same deal as 400 other investors at the same time. At the end of the 2 years no payments, you find yourself competing with at least 200 other investors who has the same thing in mind as you. Flip it and make a profit. A few of those other investors get desperate and fire sale their property, it kills the comps for the entire subdivision. Buyers who do have their finger on the pulse of the local market see this and stay away. All of a sudden you have a worthless property in your portfolio.
I have had this scenario presented to me at least 5 times in the last 2 months. If you deal with properties out of your area, find and make friends with a local expert first. Become a partner with a local agent who will advise you and help you. The local agent can help you avoid pitfalls such as this. We want to be your partner for life and help you make smart decisions.
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