http://pleasantonweekly.com/print/story/print/2006/04/21/negative-stories-about-real-estate-often-miss-the-mark


Pleasanton Weekly

Real Estate - April 21, 2006

Negative stories about real estate often miss the mark

Mortgage planner says housing still a top investment

by Jeb Bing

On April 12, there was an article in the Wall Street Journal entitled, "Hot Homes Get Cold," that gave Dave Walden the chills.

"The title alone was enough to cause me some concern because I am a mortgage planner, and a real estate sales crisis affects my livelihood," Walden told Realtors and other funding agents at a meeting of the Valley Marketing Association.

Walden, who is a certified mortgage planning specialist with Diversified Capital Funding in Pleasanton, said the article referred to a gentleman named Todd Linsley who was an investor in Florida. It seems that Linsley bought a home about 40 miles from West Palm Beach in late 2005 for $318,000 with the idea he would "flip" it for a profit, thinking it would sell for $425,000. He had planned to rent it until he sold it, even though he knew this would cause him some negative cash flow. Then the market changed.

According to the article, Linsley started reading the newspapers and watching the news about the "housing bubble, housing crash, etc." and decided he needed to unload his investment before the market got worse. He put it on the market in January for $379,900 even though Florida was growing by 1,000 folks a day and the growth in population should have equaled out the supposed market downturn.

"Here is where many of us would turn to the spouse and say, 'I told you there was a housing problem,' read them that part of the article and go back to watching TV," Walden said. "But this is where I started getting interested."

"I decided to look at where the numbers would take me and here is what I discovered," he added.

Guessing that Linsley looked at interest rates, and since investment property requires generally more money down, Walden figured that the Florida investor had probably made a 20 percent down payment, leaving him a loan amount of $254,400. Further calculating that Linsley had put about $5,000 into closing costs, had about $1,000 per month in negative cash flow and, when he sold it, paid $19,000 in sales commissions, that left Linsley with six months of costs totaling $348,000. Selling his property in six months for $379,900 gave Linsley a profit of $31,900 (before considering tax savings from negative cash flow).

"Now since he was expecting $425,000, it's easy to see why Linsley felt bad," Walden said. "Still, let's look at this as though it were real money."

"What did Linsley put into his investment?" Walden asked. "My calculations show about $69,600, including negative cash flow. If you invested that cash into the bank at 5 percent, which is what I have seen for six-eight-month minimum investments, you would have realized $1,740 in six months. In that case, Linsley would come away with $31,900."

"This is roughly a 50 percent profit in his investment dollars," Walden added. "Not bad for a 'bubbled' market. Moreover, he could do a tax-favored 1031 exchange to a similar property in a better market for more growth."

Where could you go and get that kind of return on your investment?" Walden asked the marketing group. Interestingly, Linsley might have found a lender who would have allowed 100 percent financing and then would have had no money invested and a slightly higher monthly cost for six months.

"What would have been Linsley's return then?" Walden asked.

"The message here is don't always believe what you read, less of what you hear and, if it involves money, dissect the parts of the equation and see what it really tells you," Walden concluded. "You may be surprised."

Comments

Posted by Homeowner, a resident of Ironwood
on Oct 4, 2007 at 12:14 pm

Given the reality of the market, I guess the negative stories on Real Estate were true! Of course, you wouldn't know this from reading the Pleasanton Weekly's regurgitation of dribble from local and national realtors groups as "stories."

One realtor has stepped up though. Did you see Tim McGiure's ad in last week's PW discussing how sellers haven't acknowledged reality? Wow - spot on.


Posted by Bob, a resident of Highland Oaks
on Oct 5, 2007 at 2:08 am

So true!

Which reminds me... what is always failed to mention with this so called "mortgage crisis" is that a great deal of the people who now can not make their payments flat-out lied on their application! Specifically, they lied about how much they make. At the time people were applying for these mortgages, it was quite rare for people to prove they were actually making the amount they put down. That means the majority of these people would have naturally not received these mortgages. It is not right for the government (aka: my money and your money) to bail out these people. Whatever happened to people taking responsibility for their actions?

With that said, even if people did not falsify their mortgage applications, I find it inappropriate to bail them out in the capitalistic system we have. Politicians are crying that people are being kicked out of their homes. Well guess what, those homes are not their homes. Part of capitalism is being at the will of the "invisible hand" of the economy. The greater the risk, the greater potential for a larger reward - or greater demise.

The problem with bailing people out is it goes directly against what America stands for. We aren't communists thankfully(yet).


Posted by Bob, a resident of Highland Oaks
on Oct 5, 2007 at 2:13 am

*Correction:

I meant "So untrue!" in reference to the post by homeowner.


Posted by Stacey, a resident of Amberwood/Wood Meadows
on Oct 5, 2007 at 8:05 am

I agree with Bob that the government shouldn't be bailing people out, but I disagree with the idea that the reason behind the problem is that folks lied on their applications. We just don't have any data that backs up that claim. I had read an article earlier this year or late last year that talked about a strawberry picker in the Central Valley being given a mortgage for a house he could never end up affording, but it looked good on paper initially (the first few years' payments that is, before the rate adjusted). If you want to find blame for the "mortgage crisis" we should look at BOTH the lenders (with their loose lending practices) and the borrowers (who took the money).

When my husband and I purchased our first home, we asked the broker for a 30-year fixed jumbo. When we all sat down at the title company to sign papers, this broker came with a 5-year ARM to try to strong-arm us into getting. It was incredible. We (and our real estate agent) stood our ground and demanded the product we asked for and got it (it wasn't like we weren't qualified for it). Now you can imagine someone with less resolve than us would fall into that tactic during such a stressful time and sign for the 5-year ARM.

Hopefully the lesson to folks in all of this is to stick to conservative principles when it comes to money!


Posted by Bob, a resident of Highland Oaks
on Oct 5, 2007 at 1:52 pm

Stacey,

True there are no exact numbers, and we will probably never know the exact numbers - but check out this article: Web Link

Pretty interesting. Also it sounds like some of the brokers are also part of the fraud. Shame on them. I do agree with you now that the blame goes both ways (but I am still against bailing people out).

As for your situation, good work on sticking to your guns. That is what more people need to do. This is probably one of the biggest transactions people will ever make in their life. People can't allow themselves to be taken advantage of. Especially in this day and age, people should take the time to research all their options - and read the fine print. Kudos to your family for doing that.


Posted by Homeowner, a resident of Ironwood
on Oct 9, 2007 at 5:58 pm

Just wanted to correct my initial post, it was realtor Doug Buenz who placed the ad in the PW regarding sellers not acknowledging reality (Friday, September 28, 2007 edition). Worth a read.

Kudos to the PW for finally printing a relatively negative article regarding home sales. However, it would be great if the PW used a source other than the National Association of Realtors. The NAR is a trade group solely focused on the interests of realtors. The NAR spins trends, news, and events to meet the needs of realtors, not necessarily the public. How about some independent views and analysis, outside of the NAR or local realtors or mortgage brokers?

Bob and Stacey - great points all around. Stacey I'm impressed with your financial resolve. So many folks in this town have succumbed to the pressure of keeping up with everyone else, taking out loans they can't afford or interest only loans which looked good on the way up but now look like a boat anchor as housing prices come down to reality.


Posted by Homeowner, a resident of Ironwood
on Oct 24, 2007 at 8:42 am

In last week's Pleasanton Weekly there was a Letter attempting to convince us that there are no problems in the economy or real estate. Well, today's report from the National Association of Realtors has some interesting data

-Total home sales fell 8% from August

-Home sales fell over 19% year over year

-Prices nationally were down over 4% year over year

All this from a group that would rather hide the drops than admit to them.

Why is it so hard for folks to understand that real estate has accelerated ahead of historical norms the last few years and that there will ineveitably be an adjustment back to those norms?