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.”
