How Many Licks Does It Take?

[Stella_Omega]

My landlady is land-poor. The mortgage on the place I'm living in is $300 more than I am paying for rent-- and believe me, it isn't worth half of what I'm paying.

I am putting away the money for my moving expenses. I cannot wait to stop hating her with each check I write-- but if she thinks she'll be able to get more (and she does) then I'm paying-- she's fooling herself.

 

[SeaCat]

Check out what's happening in South Florida.

Even the rich are losing money, but they aren't getting screwed like the poor.

Sub-Prime lenders need to be prosecuted and not protected.

Cat

 

[Misty_Morning]

My landlady is land-poor. The mortgage on the place I'm living in is $300 more than I am paying for rent-- and believe me, it isn't worth half of what I'm paying.

I am putting away the money for my moving expenses. I cannot wait to stop hating her with each check I write-- but if she thinks she'll be able to get more (and she does) then I'm paying-- she's fooling herself.

Im paying $1100 a month in rent (this is REALLY good for this location)....it doesnt cover the landlords mortgage of the house that I live in. But he bought this house expecting to move to this location. It didn't happen. But he is now getting about 50% of his monthly payments from me....and he is aquiring equity in a local market that will be one of the least affected by all the brew ha ha.

And in the meantime...I got got really nice digs to live in.

The house sat empty for two years...brand new. It suits him well and me too.

 

[Roxanne Appleby]

The problem for many, I think, is the perception of just how much a person, couple, or family could realistically afford. Sure, when I look at bare numbers, I could afford a house that costs me $1,000 a month. I make two and a half times that.

But then . . . .

Maintenance costs and taxes. Let's be nice and say $200 a month. Then there's the fact that I now live away from work. Oh! I need a car! $600 a month with car payments and insurance, not to mention gas. And that's if I get the cheap economy model.

I'm up to $1,800 a month already, and that's not taking into account the average of $200 a week I spend on just myself. Groceries, toiletries, those few daily luxuries I like to indulge in. Now I'm at $2,600 a month.

I'm already $100 in the hole, growing by that amount, every month. If I slip and fall at work, break my leg or get a spinal injury, I'm SOL. Unless I have enough equity in my home to take out a loan. But then, I'd be even more in debt.

Not too many people I know think of such things. The ability to accurately budget has gone out the window. "Hey! I make X amount every month, and a house costs less than that! Let's get a house!"

They aren't thinking. They aren't planning. Hell, with my tiny little apartment, and how much I make, even I get close to being in a bind once in a while. If I owned a house . . . well, I sure as hell wouldn't now. It would have been foreclosed. And I'd be back to living in a cheap flat but with even more debt than before.

There are some old rules of thumb that are useful.

1. Owning house will cost roughly 1 percent of the purchase price each month. That cost includes principle, interest, insurance and taxes (piti). So if you buy a $150,000 house, plan on spending $1,500/month, or $18,000/year. (I just figured mine - I paid $150,000, and it costs me around $1,300/month. I got a 15 year fixed at near the low for this cycle, and don't have to pay mortgage insurance. So the 1 percent figure is pretty darned close.)

2. You should not spend more than 25 percent of your gross pay, 35 percent of your take-home pay on housing.

Those benchmarks are pretty rough, and the second will be hard for most people to observe in some of the more pricier home market areas, but I think they provide useful "guardrails" that could keep people out of trouble.

 

[Roxanne Appleby]

I'm sure the entire world agrees with this sentiment. Except, of course those greedy folk of which you speak... Which makes me wonder, who are they, these reckless fools? Do you know of anyone firsthand?


Rhetoric is so easy.

Most are just fools, not greedy. The greedy are those who bought second homes expecting big profits when they "flipped" them to a greater fool a few months later.

 

[fieryjen]

How many licks? Guess you'd best ask Fieryjen, I think she has some personal experience judging by her AV...

x
V

ps- sorry for threadjack, couldn;t help meself

Apologies for the renewed threadjack, but I didn't see this until now.



I kinda want it in my sigline or something.


Okay, carry on

 

[WRJames]

I have no direct knowledge of this -- I bought my house in the late 70's. But I think what happened is that variable rate mortgages were offered with a "teaser" rate that was so low that people thought they could afford it -- then, when the rates went up, they were screwed. Particularly so, since housing prices crashed at the same time, so they couldn't even sell the house to pay off the mortgage. And the lenders are screwed for the same reason, because even if the foreclose, they can only recover a fraction of the amount of the loan -- and that not very quickly.

Was it greed on the part of the buyers? I don't think so. In some markets, even very modest houses are going for very high prices. The ones who made out are the folks who sold their homes at the inflated prices -- assuming they didn't just buy another house.

 

[Misty_Morning]

Apologies for the renewed threadjack, but I didn't see this until now.



I kinda want it in my sigline or something.


Okay, carry on

Ummm..one, two, three....


*threadjacks always welcome so they keep perspective of why we are here.... *

 

[Roxanne Appleby]

Ummm..one, two, three....


*threadjacks always welcome so they keep perspective of why we are here.... *

Smut, right? And the opportunity to associate with other sex-positive personalities?

 

[CorsetLvr]

Sub-Prime lenders need to be prosecuted and not protected.

What exactly would you suggest they be prosecuted for? Providing a product to allow low/moderate income folks to get into a home? So some of those folks made bad decisions? Is that the sub-prime lender's fault? If someone buys a car that can't afford, is it the car salesman's fault? If someone runs up their credit cards and can't make their payments, is it the credit card company's fault? Where does personal responsibility fit into your declaration of criminal responsibility? Those sub prime borrowers were told the nature of the loan they were getting. Why is it the lender's fault that they are having issues now?

 

[CorsetLvr]

I have no direct knowledge of this -- I bought my house in the late 70's. But I think what happened is that variable rate mortgages were offered with a "teaser" rate that was so low that people thought they could afford it -- then, when the rates went up, they were screwed.

Here is how most sub-prime mortgages work. The "teaser" rate you are referring to is an initial fixed rate for 2-3 years. Then the mortgage modifies to an adjustable rate mortgage. The idea behind this is to refinance the loan into a fixed rate loan after the initial 2-3 year period. This gives the borrower time to fix whatever issues they have with their credit, allows 2-3 years to go by since whatever derogatory items are showing up on their credit such as lates or collections, and allows the payments on the mortgage itself to help improve credit. Note: mortgage payment history is approx. 30% of your credit score. Renters basically get a 0 in this category, so the mortgage itself can help improve credit.

Basically, a subprime loan should be looked at as a temporary "band-aid" loan.

OK, so here is where the rub comes in. Some folks with not so good credit aren't willing or able to turn theirlives around and start paying their bills responsibly. Most do and successfully refinance out of the sub-prime loans. However, a small percentage end up going into foreclosure. Foreclosures end up having a negative impact on home prices because they are generally re-sold at under market prices so that the banks can re-coup their money as soon as possible. In addition, there is mortgage insurance on sub-prime loans. The higher risk associated with them was paid for in the form of higher rates. So, the bank could not get compensated for their losses on these loans by the MI companies.

On top of the losses in value due to foreclosures, and having even more of an impact, is real estate speculation. Some markets, sucj as California, had a huge "bubble." There was a definite gold rush/get rich while you can attitude in some markets. Like all market bubbles (like the dot.com bubble of the late 90's) they eventually burst. Folks like Alan Greenspan were warning of this. 50% annual appreciation can not be sustained indefinitely. The real estate investors were definite at fault here, and perhaps the mortgage companies as well. They were providing the mortgage programs and approving the inflated appraisals that allowed this to happen. That is no longer the case.

Unfortunately, the home owners in many of these markets got caught in the bubble, and they are basically upside down on their loans now and unable to refinance because they owe more then their house is now worth. Those markets went from high rates of appreciation to depreciation. The mortgage companies don't want to foreclose on these loans because then they are stuck with a home that is worth less then what they loaned on it. many mortgage companies are working on programs to forgive a portion of these loans to allow for refinance. The government just changed some things in the tax code so that this forgiven amount is no longer taxable.

Fortunately I do not live in one of those markets that had run away appreciation. We had, and still have, a steady manageable level of property appreciation. Real estate is still a good investment for most families. The market here has certainly slowed down and is definitely a "buyer's market." This was a huge sub-prime market. I've heard my market described as the sub prime capital of the world. Those loans are history for the most part. Most of the few surviving sub prime lenders are converting to doing conventional prime loans.

As I said in a previous post, Congress is trying to fix the sub-prime issue by eliminating an industry that no longer exists for the most part. The horse is already out of the barn.

 

[Le Jacquelope]

Just from personal experience of listening to my friends and coworkers....

most seem to be living in "very" nice dwellings and juggling bills. They live month to month on very good salaries.

I was raised with the 3 to 6 month rule. If something should happen and you lose ALL income you should be able to pay all your debts for 3 to 6 months unassisted.

I live on a modified rule...if I lose my job (which has happened to me last year) I have made plans to be able to pay all my expenses for 6 to 12 months.

I didn't get to this place cuz I want to keep up with the Jones'....I worked long and hard and suffered so that I wouldn't have to suffer....

Unemployment nowadays is more structural in nature.

Meaning when you lose your job, the entire industry has shrunken down or has gone overseas and your chances of getting rehired at all approaches zero.

Case in point, I'm seeing a flood of new loan officer resumes. We're looking at tens of thousands of resumes here, by next year. 90% of these people are not likely to ever see work in that field in this lifetime, due to the musical jobs effect.

Retraining takes 2 years, and then you are at the bottom floor as far as skill level is concerned. Employers in America don't want newbs; they want experienced, top gun talent. Moreover, when you're in your mid 30s and you're newly retrained, many employers don't want you either. I know, I interface with them a lot now.

Being prepared for a 12 month financial winter simply isn't enough. You should be prepared for 24 or 36 months. And after that, be prepared to take a deep cut in your former salary.

 

[Le Jacquelope]

80 percent of sub-prime borrowers are not behind in their payments. Half of those who are less than 30 days behind.

There were some scummy lending practices when this bubble was expanding, but either we're going to have a free society and free economy, or we're not, and if we are, then individuals must ultimately be responsible for their own actions, including taking loans they can't afford.

It's not as simple as that.

What happens when those who cannot fulfill their responsibilities, bring everyone else down? When Joe Laidoff next door to you gets foreclosed on, your home value drops, and there's nothing you can do about it.

A "free society" with no bailouts is no more immune to you being taken down along with the ne'erdowells than a "socialistic" society.

 

[Roxanne Appleby]

It's not as simple as that.

What happens when those who cannot fulfill their responsibilities, bring everyone else down? When Joe Laidoff next door to you gets foreclosed on, your home value drops, and there's nothing you can do about it.

A "free society" with no bailouts is no more immune to you being taken down along with the ne'erdowells than a "socialistic" society.

LT, spending one's entire life predicting imminent economic catastrophe is a psychological trap that's potentially more destructive than denying that sometimes - rarely - such things do occur. Since the early 1920s there has been just one really major economic catatstrophe of the sort you worry about, and a number of relatively minor ones. Anyone who sat on the sidelines expecting doom at every moment missed the greatest period of prosperity and wealth creation in the history of the world. The same could be said of the century before that, even though volatility was greater then.

As with the dot.com bubble, as with the S&L thing, as with the 1987 crash, there will be a work-out. Our system and markets have a wonderful ability to "clear" such losses. Some homebuyers will be foreclosed and their ability to take on debt will be diminished for several years; some financial institions will take hits to their balance sheets and earnings; some hedge fund investors will take a bath and their managers take a pink slip; etc. All this too shall pass. The magnitude of this event is tiny compared to the U.S. GDP and the world economy.

Take a step back and you'll see that this is a hiccup, my friend. Maybe there will be a minor recession as the Fed reverses the excess liquidity that was the real cause of the event, maybe there won't - as usual the real danger comes not from the event itself but from politicians and governments showing they they are "doing something," God help us - but either way the odds overwhelmingly favor the "aircraft carrier" of the capitalist world economy continuing to steam ahead, throwing off greater prosperity and security for all the world's people.

 

[Le Jacquelope]

On top of the losses in value due to foreclosures, and having even more of an impact, is real estate speculation. Some markets, sucj as California, had a huge "bubble." There was a definite gold rush/get rich while you can attitude in some markets. Like all market bubbles (like the dot.com bubble of the late 90's) they eventually burst. Folks like Alan Greenspan were warning of this. 50% annual appreciation can not be sustained indefinitely. The real estate investors were definite at fault here, and perhaps the mortgage companies as well. They were providing the mortgage programs and approving the inflated appraisals that allowed this to happen. That is no longer the case.

Wow. Did you realize I got verbally pounded for saying speculators were doing America (and California in particular) wrong, about 2-3 years back, before the bubble burst? I'd said they were driving homes beyond the realm of affordability, and lo and behold, it has all come to this.

 

[Le Jacquelope]

LT, spending one's entire life predicting imminent economic catastrophe is a psychological trap that's potentially more destructive than denying that sometimes - rarely - such things do occur.

a) Predicting catastrophe on any scale is one thing; preparing for it, is an undeniable rule of Charles Darwin
b) I have not spent my entire life predicting imminent economic catastrophe. It is recently that I've seen the writing on the wall, and it's in fairly large letters.

Since the early 1920s there has been just one really major economic catatstrophe of the sort you worry about, and a number of relatively minor ones. Anyone who sat on the sidelines expecting doom at every moment missed the greatest period of prosperity and wealth creation in the history of the world. The same could be said of the century before that, even though volatility was greater then.

Nobody's expecting doom at every moment here. You're creating a straw man and beheading it.

Nice swing.

As with the dot.com bubble, as with the S&L thing, as with the 1987 crash, there will be a work-out. Our system and markets have a wonderful ability to "clear" such losses. Some homebuyers will be foreclosed and their ability to take on debt will be diminished for several years; some financial institions will take hits to their balance sheets and earnings; some hedge fund investors will take a bath and their managers take a pink slip; etc. All this too shall pass. The magnitude of this event is tiny compared to the U.S. GDP and the world economy.

Meanwhile, our dollar is falling and China is diversifying. Keep an eye on that. Or don't. Nothing lasts forever, even nationwide prosperity. You assert a divine resilience that facts cannot support. The conditions simply are not in place anymore for continued broad based prosperity. They were, up until the 2000s, but not any more.

Take a step back and you'll see that this is a hiccup, my friend. Maybe there will be a minor recession as the Fed reverses the excess liquidity that was the real cause of the event, maybe there won't - as usual the real danger comes not from the event itself but from politicians and governments showing they they are "doing something," God help us - but either way the odds overwhelmingly favor the "aircraft carrier" of the capitalist world economy continuing to steam ahead, throwing off greater prosperity and security for all the world's people.

You're living in denial now. You mean to say, the rich will keep getting rich no matter what.

The middle class is shrinking. I showed that to handprints a few days back via some fairly rigorous documentation.

You cannot have a stable economy with a shrinking middle class and the ranks of the rich and poor both growing.

 

[CorsetLvr]

Wow. Did you realize I got verbally pounded for saying speculators were doing America (and California in particular) wrong, about 2-3 years back, before the bubble burst? I'd said they were driving homes beyond the realm of affordability, and lo and behold, it has all come to this.

It's funny but my neighbor came over right after my last post and was asking me questions about exactly what was happening in California. Just like the gold rush, some people with expectations of riches ended up sweeping floors in the saloons.

What was funny was that when the bubble burst on the real estate market in California there were articles in the trades in California saying the next gold rush would be here in Texas. Southwest airlines must have had to add extra flights for all the investors from California that were liquidating there and moving their money here. On top of that were the folks that missed out on the boom and wanted to get in on the ground floor here. Builders in San Antonio and Austin were selling homes to investors like they were giving them away. What added to the rush was that our property values are 25% of what they are in California. This made investment homes much more affordable for the average investor with a few dollars to spend. Unfortunately, it also created a glut of rental homes and rental incomes went down. Some sub divisions turned into rental slums and builders started limiting investment sales to 25% in their subdivisions. The funny part was that we never got to the point of having the huge property appreciation they had in in the southwest but its still a better investment in the long term.

 

[Le Jacquelope]

It's funny but my neighbor came over right after my last post and was asking me questions about exactly what was happening in California. Just like the gold rush, some people with expectations of riches ended up sweeping floors in the saloons.

What was funny was that when the bubble burst on the real estate market in California there were articles in the trades in California saying the next gold rush would be here in Texas. Southwest airlines must have had to add extra flights for all the investors from California that were liquidating there and moving their money here. On top of that were the folks that missed out on the boom and wanted to get in on the ground floor here. Builders in San Antonio and Austin were selling homes to investors like they were giving them away. What added to the rush was that our property values are 25% of what they are in California. This made investment homes much more affordable for the average investor with a few dollars to spend. Unfortunately, it also created a glut of rental homes and rental incomes went down. Some sub divisions turned into rental slums and builders started limiting investment sales to 25% in their subdivisions. The funny part was that we never got to the point of having the huge property appreciation they had in in the southwest but its still a better investment in the long term.

There is no stopping the onward march of the buy low and the sell high mentality.

Texas is just a classic case of "it costs lower here to buy a house".

The problem is, any time you see an area with homes that are lower priced, the information gets around and speculators inevitably come rushing in.

Speculators automatically drive the price of homes through the roof, and that's before you throw in the highly common but fraudulent element of inflated appraisals, etc.

I don't know what your land tax laws are in Texas, but under normal (non-California Prop 13) conditions, this drives up property values, which drives up property taxes, which drives down the purchasing power of seniors and others on fixed incomes, who might happen to own a home; it may even force them into tax foreclosure. Now ain't that a bizatch. And don't just say "too bad, so sad" to them - others who are seeing their land tax rise, will sell off some more of their retirement (401K, etc) to make ends meet, which means micro-hits on stocks. A micro hit is one thing; but if it becomes a million micro hits, you have a full "hit" on someone's stock value. California's Prop 13 severely mitigated that potential issue in Sacramento, a known retirement city; we'll never really know what we averted here. It'll be interesting, though, to see what happens to seniors in normal property tax states as speculators move into their territory.

The other issue that speculators cause, is they drive homes out of the realm of affordability for those not intending to buy and sell (as in, they just want to live there).

I feel the speculators bear the most blame, and the people trying to own their first home bear the least (though they still bear some blame). The FBI is already after the ones who inflated appraisals. I'm still working on where the mortgage companies, banks, etc. fall on the spectrum of blame.

 

[Roxanne Appleby]

You're living in denial now. You mean to say, the rich will keep getting rich no matter what.

The middle class is shrinking. I showed that to handprints a few days back via some fairly rigorous documentation.

You cannot have a stable economy with a shrinking middle class and the ranks of the rich and poor both growing.

from The Myth of Middle-Class Job Loss
By Stephen J. Rose

Economic change is a messy process. New technologies open up many opportunities for those prepared to take advantage of them. At the same time, old firms and their workers are displaced and forced to start over. In 1900, for example, 40% of the U.S. work force was involved in agriculture. Today, that figure is less than 2%, and no serious observer would argue that we are worse off as a result of this transformation.

Yet many of today's most prominent politicians and pundits are making an updated version of precisely this argument. They claim that the decline in the number of manufacturing jobs has led to the replacement of good middle-class jobs by low-skill, low-pay "hamburger-flipping" service jobs.

This kind of populist dogma is bad politics and even worse economics. The assertion that the American middle-class is disappearing along with manufacturing jobs is, put simply, based on an outdated view of how the economy operates, and is empirically wrong. Nonetheless, the view that the economy has failed the middle class is widespread. The outsourcing of jobs to low-wage countries is, of course, the latest culprit. Polemicists from all sides find it irresistible to blame expanding trade for middle-class decline. But how widespread a problem is outsourcing, exactly?

It is certainly true that many jobs in manufacturing clothing, steel, metal products and automobiles have gone overseas. Plant closures not only devastate the workers who are displaced, but they have also undermined the vitality of whole communities in North Carolina, Pennsylvania, New York, Michigan, Ohio and Wisconsin, to name just a few places. But while such communities are a clear sign of the decline in some sectors of the economy, there has been strong employment growth in many other sectors. In research just published by the Progressive Policy Institute, I show that incomes and employment have grown by substantial amounts in every state (even in the so-called Rust Belt) since the passage of the North American Free Trade Agreement in 1993.

In fact, there is no convincing, data-driven proof that trade has led to any overall job loss during the last 30 years. To the contrary, the economy has grown at a slow but steady rate (a few brief recessions notwithstanding) with trade and employment rising in tandem.

To prove that there has been substantial growth of middle-class jobs, I compare the situation that existed in 1979 with that of 2005. The base year is 1979 because it represents the last business-cycle peak before income inequality and the U.S. trade deficit began to grow quickly in the 1980s. To make the comparison fair, earnings in 1979 are increased by almost 150% to adjust for inflation.

. . . Here's the bottom line: For three-quarters of the workforce (women and the top half of male earners), economic growth translated into earnings gains. But for male workers in the bottom half of the earnings distribution, the decline of unionized manufacturing employment has led to the drying up of some middle-class jobs for those with no post-secondary education.

For the clear majority of the workforce, then, the job market has become more welcoming, not less so. But where are these jobs?

I find that most of the employment gains over the last 30 years have been in business-management activities (administration, sales, finance and business services) as well as in professional services such as health care and education. While the percentage of U.S. jobs derived from manual work in agriculture, mining, timber and manufacturing has declined, the share of jobs related to low-skilled retail and personal/food services has remained steady.

Undeniably, some people have been left out of this middle-class workforce expansion and need help in making the transition to the new economy. In particular, the last six years have seen very little wage growth for the bottom 80% of the workforce. But we should bear in mind that real gross domestic product per person is up over 60% since 1979, and our goal for the job market should not be simply to keep pace with where things stood nearly three decades ago.

- Stephen J. Rose, senior economic fellow at the Progressive Policy Institute, where he recently authored a report titled "The Truth About Middle Class Jobs." He has worked both for the Joint Economic Committee of Congress and as an adviser to former Secretary of Labor Robert Reich.

 

[Misty_Morning]

I have a very dear friend who tried to tell me to buy a house and stop waisting m money on rent. AT the time I was in a transition period and didn't know where I would want to live in the coming few years.

The area was riddled with crime and drugs. I just couldn't see myself living there long term.

I also told him that it just didn't make sense to me to purchase a house that was IMO overpriced. I needed to be liquid as I stated previously. I also told him that there were folks that couldn't afford 1200 to 1500 a month for a two bedroom two bath aprtmartment. Alot of good, decent folks that just didn't have the means.


Thats when he started investing in rental properties. He and a friend formed a business and began purchasing houses in some really bad neighborhoods and some middle class neighborhoods. These houses were horrible. They bought them for almost nothing.

But they had the skills to go in and gut the houses, refurbish them and provide nice dwellings to those that needed them. They were very selective in their tenants. And they relied on the long established neighbors to give updates as to any odd behavior.

Bottom line, ALL neighboorhoods can be turned around. What he and his bussiness partner have basicically done is rejuvinate certain areas that were once abondoned while providing a place to live that was BETTER than what was currently available.

Generally, they would pay off the mortages on the rental properties with 3 to 5 years, then around and borrow more money to buy additional houses.

They have yet to make any substantial in pocket profits, but their wealth was inceased by leaps and bounds. And they are making life sooo much better for others.



SO I guess their are more than one type of folks that invest in rentals....those that see it as a long term commitment forthemselves AND he community they live in, and those that see it as merely profit based.





IF I had the resources, i would also invest in rental property. Folks gotta have a place to live.


Folks like me...who can't or refuse to pay the outrageous price of for houses in todays market. Fols that will come in and actually increase the value of the property making upgrades and keeping the place well maintained.




Just wanted to add another facet onto the conversation.

 

[trysail]

People have always overestimated the "investment value" of home ownership for the simple reason that they invariably neglect to include the costs of insurance, maintenance, the time value of money, and taxes. Roxanne very correctly alluded to this in an earlier post. All those anecdotes that were abroad about John Q who bought a place for "x" in 1987 and sold it for "3x" or "4x" in 2005 had the effect of firing the imaginations of the gullible and the innumerate. Realtors have always promoted the false claim of the "tax shelter" that is purported to exist because of the deductibility of home mortgage interest. It's a completely bogus claim. Interest is still interest and, deductible or not, it's still an expense.

 

[CorsetLvr]

I have a very dear friend who tried to tell me to buy a house and stop waisting m money on rent. AT the time I was in a transition period and didn't know where I would want to live in the coming few years.

OK, here we go.

What you are referring to is called a "fix & flip" in real estate jargon. There is a huge profit potential but there are some significant risks associated with it, like any investment.

1. It takes money. Most flippers use a hard money lender at high interest rates or their own money, or something like a line of credit to finance the deals. In addition to the purchase money, you need money for repairs and improvements. Because of the hight interest rate, the goal is to get in and out of the property as fast as possible. Fees on a hard money loan can be very high because they know the loan is going to be short term. They are making their money on fees, primarily what is called discount points. Unless you have a proven track record with a hard money lender, they are probably only going to lend you 75-80% of what you need.

2. When they payments on the property kick in, your profit goes down. This is called the "holding cost."

3. There is always the potential of running into issues you weren't counting on on these kinds of run down homes such as roof problems, foundation problems, electical, plumbing, or undiscovered termites. If its not in your original budget, or exceeds your contingency fund, your profit is going down.

4. When the house is ready to go on the market, you have to get a buyer in fast. This is harder to do now because of tightening credit standards. Good credit scores are not exactly real common in low income areas. If you get into this, make sure you have a very good loan officer you can refer your buyer to that knows how to work deal with people with "challenged" credit and low income. That's an art in and of itself.

5. On top of that, lenders are a lot less willing to go along with flip deal now. I am referring to your buyer's lender. They are limiting the profit margin to 25% after the purchase and improvement costs. That's still not bad, but what if it doesn't appraise for an amount that is more then what you put into the property? You eat the difference.

6. A lot of people have tried to do flips as a result of shows like "Flip this house." I know some people on that show and have done some number crunching on the deals they show and I can tell you the profit they are showing are inflated. Also remember you have to pay capital gains tax on investment properties. They are not exempt like your home. Remember that the folks on those shows are professionals and do this for a living and have the capital to survive an occasional bad deal. They are also doing full time. I've known people that think they can do flips part time. If you are not sitting at the property making sure contractors show up when they say they will, you are doomed. First rule, if a contractors mouth is moving, only count on 50% of the words to be true, especially if they involve the word "when."

7. Lastly, don't fool yourself about the humanitarian nature of this business. It's all about the money, pure and simple. These folks are not social do gooder's on a campaign for inner city improvement. They are out to make a profit. If some good comes from it, more the better. They can go talk about how they are performing a social service at their cocktail parties.

 

[Stella_Omega]

7. Lastly, don't fool yourself about the humanitarian nature of this business. It's all about the money, pure and simple. These folks are not social do gooder's on a campaign for inner city improvement. They are out to make a profit. If some good comes from it, more the better. They can go talk about how they are performing a social service at their cocktail parties.

While I agree with this statement in general, Misty was talking about someone in particular.

Don't insult people you don't know.

I have a friend quite like this myself, who was my landlord for 12 years. he tried to balance his income needs with his tenant's abilities to pay, and he kept his rents low on purpose. he could have gotten two to five hundred dollars more for my apartment, but he didn't ask us to move, ever.

 

[Roxanne Appleby]

People have always overestimated the "investment value" of home ownership for the simple reason that they invariably neglect to include the costs of insurance, maintenance, the time value of money, and taxes. Roxanne very correctly alluded to this in an earlier post. All those anecdotes that were abroad about John Q who bought a place for "x" in 1987 and sold it for "3x" or "4x" in 2005 had the effect of firing the imaginations of the gullible and the innumerate. Realtors have always promoted the false claim of the "tax shelter" that is purported to exist because of the deductibility of home mortgage interest. It's a completely bogus claim. Interest is still interest and, deductible or not, it's still an expense.

There's another angle on this. You can't really "make money" on your own home, because if you sell it you still need a place to live, and if you "made a profit" because the general price of real estate went up then whatever replacement home you buy will also have risen in price. Of course if you sell a 4 br ranch and buy a 1 br condo you can pocket the difference, but generally it's a zero sum game.

Your dwelling is just a form of consumption, so strike a balance between frugality and enjoying a pleasant home environment. The latter because in the long run we're all dead, so you don't want to live in a dump if you don't have to. If you want to invest, buy a mutual fund. (A REIT if you like. )

 

[WRJames]

LT, spending one's entire life predicting imminent economic catastrophe is a psychological trap that's potentially more destructive than denying that sometimes - rarely - such things do occur. Since the early 1920s there has been just one really major economic catatstrophe of the sort you worry about, and a number of relatively minor ones.

Ah -- only one little blip -- just the Great Depression -- which ultimately caused the demise of a hundred million or so, not to mention two decades of misery. Since then, for some strange reason, no one has quite trusted the market to cure itself. Strange, isn't it?

As for the subprime lenders -- they are taking a huge hit. I'm not surprised to hear there are a lot of loan officers looking for work -- very quietly, some of the major financial institutions are going through a round of layoffs -- peeling out their top and bottom layers, and sending a lot of their back office to lower cost countries (or towns -- Budapest or Buffalo). One hopes that the economy will absorb this -- but it's worrisome.