Aug 29 2008
A New Norm in Real Estate
“You got an offer,” said my agent, Bob, over the phone. “It’s fair. And let’s face it, you don’t have a long line of people wanting to buy it.”
Thrilled, we accepted the offer, only to have another phone call later that night. “There’s some issues,” explained Bob. “Their credit isn’t too good. But we’ll let the bank worry about it.”
I leaned back and thought about this “flip.” It had not gone as fast as I had wanted. The building had housed a factory, and we picked it up in the dead of winter for what I believed was a song. It was packed to the rafters with “stuff.” There was an old motorcycle, portable fishhouses that never quite got made and sold, and hundreds of linear feet of wood. The most daunting thing was 17,000 lbs of polypropelene/cotton mix that the former owner had used in his factory. No one wanted to buy the batting, as it burst into flame the second a match touched it. Yes, it had been a chore to get it cleaned up, lengthened out by a sudden addition we had to build on our own house. When the cleanup was close to done, we put it up for sale. In the time we had held it, the real estate market had its expected correction. We could still get a reasonable profit for this property. The best part of owning it was the adventure our sons had while we were working over there. One had set up his archery set and gotten in good practice. The other found grasshoppers, sticks that became his swords, and explored the long tall grass on the six acres. We needed it sold, but the boys were sorry to see it go.
Within the next five days there were a flurry of phone calls. One bank thought that it was no brainer, that there was enough collateral. Hours later they were not interested. Then there was our bank who was stopped cold by a medical bill judgement on the buyers’ credit report.
In the end, my agent was kind enough to negotiate a lease/option to buy, and a huge problem in my life was solved. The mortgage was getting paid, and the place had a security presence.
Suddenly, my brother’s house had sold, and he was carrying the note. Another property sold down the road, with the owners being the primary to the bank. The banks, who have suddenly become tighter than a bowstring, are suddenly out of the loop of what used to be common transactions. Unless buyers have sterling credit, banks won’t touch them. Sellers who want to their property gone, take on the risk.
How does that affect you? First, the profitability of banks will not be the same, nor will the losses. That’s something to keep in mind when investing in bank stocks in the near future. Once the foreclosures have evened out, and the banks get more solid, their bottom line numbers will be effected. P/E ratios will be significantly changed, net profits may be lowered, but banks will be more stable. Also, there will be more debt on individuals, which will slow down investors who normally grease the movement of our country. There will be more rentals, and there’s a good chance interest rates will creep up.
Though we are going to see some stability for a while, expect another round of higher gas prices, perhaps more foreclosures if the war isn’t dealt sooner. The health of our financial system and normalcy in the real estate market will return when the financial drain of our wars overseas has gone away.
