The implosion of real estate prices in the last two years has encouraged many would-be investors to jump into the foray of real estate ownership. Prices, in some cases, are at multi-year lows, and some properties are being offered for what was previously thought of as ridiculous discounts — 70% to 80% lower prices. With such discounts also come reduced property taxes, which are assessed, in Florida at least, as 2% of the purchase price, minus a variety of discounts, such as the $50,000 homestead exemption, depending on the buyer’s status. Add to that some deeply reduced insurance premiums (because a lower-priced property now has less to insure), and you have a compelling motivation to buy — and in many cases, buy more than one property. For example, a house that sold at the peak of the market for $500,000 was recently sold as a short sale for $175,000 — an enormous discount. The buyer intended to live in the house, and therefore, qualified for the homestead exemption; thus, based on a simple arithmetic calculation of 2%, the property taxes on the home went from a high of $9,000 ($500,000 – $50,000 x 2%) to the current assessment of only $2,500 ($175,000 – $50,000 x 2%) — a mere 27% of the prior assessment. Homeowners’ insurance dropped from $5000 when the house was worth $500,000 to a current $1,100. Assuming a 20% downpayment, and again assuming a simple mortgage rate of 5%, the original house carried a mortgage amount of $400,000, but the current house carries a mortgage of only $140,000. A fraction of prior costs.
But caveats are in order. The old adage that price isn’t everything, applies. The real estate market is currently in a state of great flux, not to mention great uncertainty. In the days of ever-increasing real estate prices, real estate property of all kinds was being built as fast as permits and materials would allow. And people bought at such a hungry, frenetic pace that prices accommodated the demand. The situation now is the opposite: people are waiting to buy; people are comparison-shopping (anecdotally, one woman claims to have looked at 800 properties!). The number of single-family houses on the market are growing daily, with great numbers of foreclosures and short sales flooding the market. The inventory of current real estate is huge, and will not abate for a number of years. Even if builders slow down the construction of new housing, the current slate of offerings needs to be absorbed by the marketplace, and clearly, not as many new households are forming as there are empty housing units on the market. Which will inevitably lead to lower prices. How much lower is unknown; however, pressing to buy at this time may not be in the best interests of the buyer. Of course, there are mitigating circumstances which might compel one to buy: for example, if one needs a place to live, and the combined costs of ownership are comparable to the cost of renting.
Moreover, some of the best “deals” are found in what are now considered blighted areas — previous new developments that now have only a few houses built and fewer lived in, surrounded by builders’ lots staked out for construction as far as the eye can see. One might think such living is quiet, with no neighbors, but in fact, living alone in a large development can also be risky; and the empty buildings do encourage criminal activity. Still, there are stalwarts who would elect such arrangements just to take advantage of the low price.
In such a situation, lifestyle might suffer, as school buses refuse to drive by because of construction debris left in the road; children do not play outside; and other impediments to what usually makes for an enjoyable life in a new neighborhood.
Many a current buyer jumps on the real estate bandwagon because the prices seem so ludicrous, that “flipping” seems an ideal road to riches. True, some lucky few succeed: they buy a property at a rock-bottom price, spruce it up a bit, then resell it for a small margin which is still below current market prices, and thus are able to make a business profit out of the deal. But remember that real estate is notorious for not being liquid, and especially today. At the height of the market, sellers were in charge, and demand was booming. Now, the opposite is true: inventory is huge, and buyers are few. Combined with a depressed economy (owing to a large extent to the real estate fiasco), and you have a preponderance of skittish buyers of lesser means and lesser credit. That does not bode well for reselling your property once you have bought it. Add to that the current uncertainty — and in some cases, scrutiny — of banking practices, which make them reluctant to lend, this makes obtaining a new mortgage an onerous affair. Not to mention the current title insurance snafu that is making many title companies unwilling to issue title insurance, and you are looking at what to some might be an untenable situation. I would not want to be the holder of a property that I am trying to sell to a public that is largely unable or unwilling to buy, or if willing and able, then a public that has to jump through so many hoops in order to buy; meanwhile still paying necessary expenses on such property. Unless, of course, I need a place to live, and am content to sit in my property until such time as the market changes.
Real estate ownership has been billed as the greatest road to riches in the United States. The richest people in America have been touted as having started in real estate. And to be sure, tremendous deals are to be found. But for the average Joe, I submit that there are better places to park your money; there are better ways to make money, especially if that means not putting it on a piece of real estate that may still have a way to go — down.