We had listed our little two bedroom house, had one offer and it fell through. But our real estate agent said we'll get another offer. We had bought it only two years before for $65,000 and our last offer was $154,000. I was certain that the property was not worth that much because I could only rent it for $500 per month.
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| I took these pictures today, Feb. 14, 2012 |
There was going to be more maintenance. I was sure of that.
This was January of 2006. Real estate prices were way too high. I was sure of this because every where I looked, rental prices were still less than my estimates of what the payments were. A lot less.
Real estate value and real estate prices are two different things. Real estate is a commodity that fluctuates with supply and demand. The price can go way higher than the value. The value is what it is actually worth to an individual. Most people cannot tell the difference.
I always calculate the value of a piece of property as the amount about 100 times the actual monthly rent that I can get from the property. That is not the way real estate appraisers value a property. They hardly take into account the amount of rent that is paid. In fact they often discount it completely.
Appraisers only count the supply and demand. As far as appraisers are concerned the amount of rent has little to do with the appraised value. They are only looking at what it will sell for in the market at that specific time. So an appraiser can be way off of the real value.
That is reason number one for the crash.
So if you live in a home that, let's say you pay $1300 per month payments including the taxes and the insurance, my value for that property could be no more than $130,000, but if you could only rent it for $900 per month then the value to me could not be more than $90,000.
But I would never pay you $90,000 for your property unless you gave it to me with no down payment and only a $600 per month payment. I would rather pay you $60,000.
That's because I already made the mistake of buying a $50,000 property for $64,000 which I now had to get rid of quickly because I felt the market was beginning to drop.
I had these rules up to about 2004 when I decided to buy that little piece of property. I was actually anxious to buy it, nervous that I would miss getting a piece of property when prices were rising so quickly. That's a dangerous sign. It means I was being influenced by the speculation of the times.
It was the only property I ever had put a relatively large down payment on. Almost all, if not all, of other purchases were for almost nothing down, but this time I did it. I put $16,000 down.
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| This is the back view. |
The first rule of investing is to never count on appreciation for profit or protection against loss.
That is reason number 2 for the crash.
People were depending on appreciation to actually make their payments on their homes. They were thinking of their homes as an investment, and they would buy a large home with little or no down payment and a monthly payment that would only remain the same for about five to seven years, if...... if the interest rates remained the same.
"It's all right," they thought. "We can always sell it for higher, or refinance it."
We have all been lucky about the interest rates. Interest rates have remained stable or have even dropped. But that has been forced by the government printing money, trying to stave off a real disaster.
After the five to seven years their loans had a clause that they needed to either pay a large lump sum or refinance it. Every one thought they could refinance their homes.
Study this current, February 14, 2012 description of the little piece of property that I've been telling you about (below) from an online company, and in my next post I'll tell you the rest of the story.
But if you'll notice, I think their estimate of the rent is still way too high. I think it would only rent for $500 still today.
