What do you think about my friend’s situation?

[powayseller]

My friend tried to sell her house this summer, for around $815K. Many open houses, many lookers, no offers. They lowered to $765K. No offers. Their realtor suggested they lower to $740K, but they decided they didn’t want to “lose so much equity”.

So they decided to take out the equity to flip properties in Arizona and rent the SD house. They took a home equity line of credit and bought a house in another overvalued city (Phoenix) which they are renovating with the intent to resell in a couple years. They are going to rent out their San Diego house. They may move back into it in a few years, or sell it when the market recovers. Phoenix and Las Vegas are even more overvalued than San Diego, according to the PMI report. (Nominal price less, but percentage overvalued is greater)

The husband has no formal education and makes his living by fixing up and selling properties. I sent them the Bubble Primer from this site, but they read too many “Rich Dad Poor Dad” books, and don’t believe a correction is ahead. Today she told me that they have talked to many investors and realtors and they don’t believe there will be any noticeable price drop in housing. Of course they can’t believe it – their decision to flip properties for a living is contrary to the information I provided. I feel so sad for them, with 3 little kids, and wonder how they will survive when they have to foreclose on these houses. Oh, and she thinks she can get $2500/month rent on a 1600 sq ft house, because that’s what she needs to cover her morgage and home equity line – I think she’ll be lucky to get $1800. They’re not moving to AZ until spring, so this hasn’t hit her yet. Sad story. I myself got a second offer on my house, for the same price as the first offer. The offers are about 6% less than what the realtor and I thought it should be based on comps, so the correction has started.

[lindismith]

PS – Just wondering whatever happened to this friend of yours?

I remember reading this last year, and at the time being too afraid to answer, “OMG, I think she’s totally $***ed!”

Funnily enough, no one else ever answered either….

I remember I was a little nervous to say that I thought she was making a huge mistake, and two, while I was convinced she was making a mistake, so many people were still so high on real estate as an investment that couldn’t lose, it seemed somehow sacrilegious to even say anything in opposition.

Of course now I am a converted Piggington, and I’ve read so much good analysis on this forum, that I can’t believe I ever questioned myself.

Anyway, do you have an update for us? It’s been 7 months now since this post.

[powayseller]

Funny you should ask…. her house is for rent again, and I copied her Phoenix phone number off the For Rent sign.

She is high as a kite in Phoenix. Despite the soaring inventory and dropping prices, she is doing very well flipping properties. I was going to make a thread about this, because I am so amazed, and don’t see how this can last.

First, her Poway rental is attracting 3 calls/week, for $2500/month, well in excess of her mortgage and HELOC. So she is going to be cash flow positive on that one.

Second, they bought a foreclosure which they flipped at a $30K profit, and her husband just bought another one. He will spend $40K and sell it at a $60K profit in a few months. I wonder if they will chase the market down, or if they are really savvy and have figured out how to make money in a declining market, just like Chris J makes money on some days when the stock market is up, even though the general trend is down. Perhaps this friend finds a few gems that are a bargain.

I asked her how the housing market is, and she said “very good”. Her cousin sells high end homes, and the market is hot, she said. Now I know that the high end market is still holding up well.

I am flabbergasted by her experience, and I have no clue how they pulled this off so far. My guess is the house they are fixing up might be worth $380K in today’s market, but by the time he is done fixing it up and lists it, it will be worth only $330K, and his profit is gone. I will check back with her later this year. She said we should keep in touch.

She asked me, “Have you bought another house yet”? She doesn’t get it… but her perspective is so different from mine.

On a related note, my neighbor made 3x her money in Yuma, AZ investment property, and is putting money into another deal: a commercial plot, which should increase in value after the oil company deal in Yuma goes through. I will check this out further and start a thread. Do any of you know about the potential for this?

[North County Jim]

You obviously know your friend better than I do but I might take her observations with a slight grain of salt.

[powayseller]

They bet their entire net worth on buying distressed property in Phoenix and flipping it. So she is in denial.

Before they moved, she avoided me for a while, after I sent her the piggington links and economic data, told her we were selling and renting. After a while, she talked to me again, and she asked me surprised why we would sell. She never once asked me, as a rational investor would, what might be the downside of her plan.

She was real excited about her husband’s prospects, and this is something he’s always wanted to do. So she is definitely emotional about this.

I still wonder how they are able to make money flipping, and how long it will take for her to realize that the gig is up.

[SD Realtor]

I am surprised that she has done so well in Phoenix. I have heard that the market has changed there. If she is doing well, then good for her! Personally I have found people who get emotional about financial transactions enjoy talking about the successes but clam up about negative outcomes.

[Bugs]

The appraisers in Phoenix and Tuscon depict a market that’s declining faster than San Diego. Foreclosures going through the roof. If your friend is doing well in that market their powerful wealth building system would probably be even more effective here.

[an]

“Personally I have found people who get emotional about financial transactions enjoy talking about the successes but clam up about negative outcomes.”

I find the same thing. People tend to be very verbal about their successful transaction and never say anything about their unsuccessful transaction. So, I tend to take everything w/ a grain of salt.

[powayseller]

Their one foreclosure sale gained a profit, and they think this second purchase was a low enough price to gather a profit. It remains to be seen if they are really chasing the market down. The only person she knows in the Phoenix market is her cousin, who builds high end homes, and as we discussed, that market is still hot. So she has a very limited and rosy colored view. My guess is by December, their most recent purchase will be a loss, after improvements, because prices are dropping so fast. They are Rich Dad Poor Dad followers, but I think they stopped reading him after he got sour on RE.

By the way, I have very good friends in Phoenix who were just visiting. He is a RE lawyer, and he is involved in big transactions. His view is that residential sales have really slowed, will plateau throughout 2006, and will pick up again in 2007. Meanwhile, his commercial and retail projects are going strong. So he is a little bit worried, but he is so busy with this big client who keeps developing, that he doesn’t have any major worries. Since they are on vacation, I didn’t want to upset him by telling him that retail development lags the economic slowdown by up to 9 months. My belief is that by next summer, we will no longer have any retail or commercial projects starting, sicne the recession will be in full swing.

I told his wife that he should diversify. Get in foreclosure and REO deals, or defend builders who will get sued, lenders, etc. It’s time to diversify so he can keep supporting his family.

[lindismith]

Very interesting indeed.

Just so I’m clear: in 6 months they made 30K?

Is that their only way they earn income?

And, now they think they can make another 20K?

And their mortgage is covered here…

I don’t know, but it doesn’t sound like it’s great money to me. Doesn’t seem like the cost of living would be significantly lower there. If that profit is above and beyond their regular works’ incomes, then it’s a nice investment windfall, but if that’s how they earn a living, it’s really not enough.

What am I missing?

[powayseller]

That’s how they make their living. So they have a rental in Poway, and one in Palm Springs. Both are cash flow positive, and a little cash left over.

They make $70K/year flipping properties, maybe hoping to eventually hire a crew and increase that? It’s a lot cheaper to live in Phoenix, and they can live for that. Plus he is doing what he loves, so he is happy.

But I think this is not a sustainable business. I don’t think they will keep finding properties undervalued by $60K each. Even if they did, by the time they fixed it up, the market is down more, and it is undervalued by only $20K or $30K.

They are in denial, as is my friend the RE lawyer. So here wer have people actually in the business, as is murray, who are in denial!!! It boggles the mind. The masses are completely unaware of what is about to happen, if the investors and RE lawyer don’t even know.

That is the fascinating part of the story, the denial among investors.

[lindismith]

yes, agreed.
Denial is very powerfull.
Plus, it’s not about to happen – it is happening; I’m convinced they have just been lucky up to this point. And it remains to be seen if they can actually earn the $70K.

Please keep us updated. 🙂

[ocrenter]

a clerk at work is bettering herself by studying to become a loan broker.

a client told me he is currently studying to become a Realtor and a broker because his brother/sister in laws are doing really well.

both are within the past month.

apparently neither one got the memo.

[LookoutBelow]

I have to say that your friend is possibly blowing smoke here….My father, a retired contractor/developer in Scottsdale paints an entirely different picture. Entirely !

Do you really believe that hype PowaySeller ? Its just as easy to look up the phx, real estate situation as it is the san diego market which you seem to be completely in touch with, why dont you do a little investigation on your own to ferret out the truth of this nonsense before you post it.

[ocrenter]

all poway is saying is what her friend “claim” is going on. Plus others asked her to update on this friend. Why are you picking on her?

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