Another Swing, Another...

Roger Schlesinger
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Posted: Aug 05, 2008 8:14 AM
Another Swing, Another...

Here we go again. Real Estate has shed some value and I am hearing the same thing from the same people I heard from in 1993-5, 2001-2 and of course 2007- whenever. "When the prices get a bit lower I am going to step forward and purchase a piece of property." Those who were telling me this in the early 1990s for the most part moved to Texas from Southern California in the late 1990s. The ones who were waiting for a better deal at the turn of the century are still on their knees praying for real estate in Southern California to keep coming down. oes anybody know anyone that bought real estate at the absolute bottom of any correction? Before you try to hunt someone up, realize that there isn't anyway to tell because each piece of real estate is generally different from every other piece. Even in a tract of homes the location has an effect on the price, the lot size has an effect, the direction it is facing can have an effect, etc. Perhaps it is time to look in the mirror and find out if the one who is staring back is ever going to take advantage of any real estate correction.

Why am I so concerned about anyone buying real estate? First of all owning your own house is the American Dream. Second, I believe it is the easiest way to create an estate of size for the average American. Is it the only way to build your assets? Absolutely not. I would trade a house for an oil field, gold mine, large plot of corn, a coal mine, etc. I just don't think that is going to happen to me, so I'll stick with real estate. The government is currently begging people to become rich, because if you buy and sell a house you have lived in for two years, they will let you take out $250,000 in profit tax free or, if it is you and your spouse, the government will double the gift: $500,000 tax free. You aren't going to find that largess in too many other places.

I realize human nature takes over in times of daring. When the stock market is low you can't find a great number of people who wish to invest, but when it heats up and is on the move, watch out for the crowd. Real estate is the same way. The papers continue to put up huge headlines about the drop in value, but today I noticed a small story about how Southern California real estate has picked up as more and more people are buying the low priced real estate. The investors are stepping up, why not you? The opportunities abound.

Let's look at two ways to go: purchase or lease option. Both will get you where you eventually want to be: an owner of a piece of real estate. Those who have good earnings, a down payment, sufficient reserves and good credit can purchase immediately. Those who are deficient in one or more of these areas can lease option a place while building up those areas. Now, more than ever, is the time you want to tie up some real estate even if it is going to take a few years to be ready to exercise your option. Not only are the prices down, but if you are a first time home buyer you will get a $7500 tax credit from the Federal Government. (Details on what it takes to be a first time home buyer and how to get the tax credit are available upon request).

A young couple came to me a few months back and wanted to buy a house. He was making a good living, but was self employed and was writing everything he could off. Therefore, he didn't show enough in earnings. She was working part time. I gave them a maximum price which they could qualify for but they couldn't find anything that suited them. I showed them how a lease option worked and they immediately went out and were able to find something that worked for them. The lease part was exactly what they were currently paying in rent and they were going to get $300 a month of the lease going to their down payment. That meant they were actually saving $300 of their rent to use as a down payment for their house. Now with the advent of the tax credit he can afford to show his true earnings. This will allow him to qualify for the purchase and trigger the tax credit. By mid 2009 they should be able to be new homeowners by exercising the option on the house they are now leasing.

If you are an investor, the lease option can work for you as well. In as much as you are going to rent or lease the property when it is yours, you can do that to cover the lease payments on your lease option contract. When you are ready to exercise the option, you will already have your tenant and the transaction should make good economic sense. How hard is it to lease option? Many homeowners are in need of getting off the payments, so a lease option is appealing for them. Not everyone will be accommodating but there are likely more sellers than you thin who will be happy to entertain a lease option offer.

Will real estate rebound? This is the question many people have on their minds. Houses are where people live and this country, in many places, has a shortage of housing. The growth of the population is one reason (birth minus death plus legal immigration), as well as the ever-growing trend of foreigners buying our real estate (if for no other reason than to take advantage of the currency exchange rate), and the ever increasing demand for second homes by the "baby boomer" generation. America's real estate is in demand even if we have a current down turn. I can tell you, from my experience, it is easier to make money in real estate by buying low than it is by selling high.

There is a contrary point of view to which I do not subscribe. Real estate is over priced even now, will not recover for years and will not approach it's former value. That could be true in some areas but there are areas in the country where even now the prices are as high or higher than they were during the last upswing. Why is this happening when we hear so much negativity? Building materials are higher than they were and still going higher as Asia is buying everything it can to meet its growing needs. Building regulations are stricter than ever causing more expense to the builder and demand for top properties still exists in the upper ranges. Lastly, when the building industry gets back to work in the next few years they will not be able to build anything that would have the current prices as their price tag. Once the current inventory is through prices will be going upward because shortages in housing will allow the builders to pass along not only the increased costs, but their profit as well.

Forget bottom fishing. You will never know when the bottom has hit until after the turn and prices are heading higher.

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