The Reality of My Estate

The Brain Dump of a Chicago Real Estate Consumer

Friday, January 05, 2007

On HGTV and Spam, Part 2

Who in their right mind would buy such a place?

The question, of course, is somewhat rhetorical, because I'm sure the answer I would (and will) give is fairly evident from the tone of the previous post.

Only someone gullible, naive or (worse) shady would buy such a house at its new asking price of $130K. If someone were to buy such a property at or even near its new asking price, the best-case scenario (for the new owner) would be to make cosmetic changes only and try to flip it as quickly as possible. This is not only bad for the property (making no substantive improvements, only cosmetic) but it's also bad for any subsequent owners who, assuming they've been deceived by appearances, will be buying a needy property at or near the neighborhood's "fixed-up" market value. It's also, as I write this, not terribly likely that the cosmetics-only Shady Owner would be able to flip it quickly, since it is now a buyer's market, and potential buyers can afford to be choosy (even if, at 150K-$175K, the house and neighborhood would be considered "lower middle class" in Chicago).

Remember, nothing has been done to improve the property — the Spamheads are just trying to cash in on the profit formerly collected by rehabbers. Even a shady fix-and-flipper is probably going to know this (assuming, like most cons, they have a certain misdirected cunning brilliance about the pool in which they're swimming).

So who's left?

People watching HGTV, of course. I guess I really shouldn't dump this all on one cable channel's shoulders, but as they're one of the most high-profile, most "respectable" disseminators of real estate info out there, they're an easy target. Moreso, in fact, than the out-of-date "make millions in real estate" books on the shelves of Borders, or the late-night "turn debt into wealth" infommercial schemers, because one doesn't even have to buy a book or set of DVDs.

Specifically, the charge I'm levelling is that some of the programming on HGTV, like spam, shows mostly (if not all) Upside but little-to-none of the Downside. The few times I've seen people get in over their heads on HGTV rehab shows, the shows have made it clear that the owners have either made horrendously bad choices (ones which, of course, the Viewer presumably wouldn't make) or the owners happily justify their over-expenditures by keeping the property to enjoy for themselves for a while.

What we never see on HGTV is someone get in over their head, end up being unable to handle duplicate mortgages, and having to sell the property for a song to avoid financial disaster. And this is what my wife and I see fairly frequently, particularly when — pumped up on TV visions of "doing it right" and making $10,000+ in the process — they naively buy a property from Spamheads without truly appreciating the expense involved in rehabbing a property.

The casual reader might think I'm simply chomping on sour grapes, or that I'm bemoaning 6-digit profits lost to the competition in a free-market society, but that's simply not the case. Frankly, I've never seen 6-digit profits. Matter of fact, in the example I gave, the most I would expect to recoup from the middle-class property I mentioned is about $10K-$30K (max). Neither my wife nor I are Rehabbing Gods, but we've had enough experience to know that the cost of repairs alone would be in the neighborhood of $50K-$70K, improvements to update the basic amenities to modern standards (necessary in a buyer's market), an additional $15K-$25K and, assuming we did want to sell it (highly likely in this case), there's the Seller's Discount of roughly $20K to consider.

To be continued...

Friday, December 29, 2006

On HGTV and Spam, Part 1

How much spam do you get in your email inbox? If you have an email address and only give it out to family and friends for occasional use, you probably don't get much spam, and you probably don't have a full appreciation for the true scope of the problem that spam presents. Me, because I exist daily in a tech-rich environment, I get a HUGE amount of spam each day, numbering about 9 bogus emails to every valid one. That's even with various spam filters on both the mail server and my email client. Imagine having to sort through tons of junk every single day, just to get some basic business done. And it has the general overall effect of making me skeptical and unenthused about that business. (I truly believe that the advertising industry in particular — and possibly also the pharmaceutical industry — should take a leading role in pursuing and prosecuting spammers, since the public in general is having their basic opinions of those industries and their receptiveness to advertising permanently altered by the constant Garbage Barrage they are now receiving.)

Well, I can't necessarily blame this on HGTV per se, but there is an element in the real estate industry that has much in common with the shady fly-by-night operations pushing penis-enlargement pills via email, and unfortunately there's a gray area between good and bad which some of the programming on HGTV plays into. Don't get me wrong, there's definitely something to be said for general boosterism in any industry, and wide dissemination of information on basic topics like choosing a house, what to expect in a property transaction, the ins and outs of financing, etc. is a great equalizer and empowers people to avoid being exploited by the occasional slick-talking insider.

That said, any product or industry where the potential profit and/or the median transaction is fairly large in relation to the amount of time and effort expended will always attract the worst kind of element seeking to... well... exploit it.

Case in point: Until fairly recently, rehabbing/restoring/repurposing was a fairly arcane niche of the real estate industry. I suppose it's always existed in some way, but for various reasons I think it didn't have what Hollywood calls "cachet" until a decade or two ago. (It didn't really register on my radar until Bob Vila debuted in This Old House on PBS.) Since then, however, owning older properties has become more "cool", which has led to more of a market, which has led to more people willing to supply that market via rehab. Which, believe it or not, has led to a secondary market of Spamheads who are looking to supply the suppliers by inserting themselves between the properties and the rehabbers.

Under the typical, non-spam scenario, a rehabber looks for a distressed property selling at an appropriately discounted price and buys it, then invests time, money, and usually sweat equity in restoring the property to a value commensurate with comparable non-distressed properties in the neighborhood. The rehabber's reward is the sale price minus their purchase price, minus the money they've invested rehabbing it (and, I would strongly argue, compensation for their time).

Well, right now here in Chicago, there are a number of entities which are purchasing distressed properties for no other reason than to sell those properties to rehabbers (taking, of course, as much profit out of the transaction as possible). Mind you, they do no substantive work on the property while they hold it — they simply pay the property taxes (or not) and wait for a gullible rehabber to take it off their hands. It's all speculation, of course, but while the standard Real Estate Speculation scenario (which has a loooong and colorful history) is typified by an owner holding a property that appreciates, in this particular scenario the owner is holding a property that is steadily DEpreciating due to their inaction. In one particularly memorable instance, I saw a distressed house in a middle-class neighborhood that would have had a fixed-up value of roughly $150K-$175K snapped up by one of these entities for $50K and then listed for $130K the week after they closed. Aside from transaction costs, they invested nothing more than the cost of plywood sheets to cover up the windows. That house is still sitting untouched today. The Spamheads list it periodically on the MLS until the listing gets stale, then take it off for 91 days before making a fresh listing.

Who, in their right mind, would now buy such a property for rehabbing?

To be continued...

Tuesday, December 26, 2006

The Beginning

About a year ago, my wife & I bought a house in Chicago. Actually, I should say "another house" because it was our second Chicago real estate purchase. My wife's avocation is rehabbing and restoration, and she comes by the title "rehabber" honestly — she does not "fix and flip" for a fast buck, nor does she make minor cosmetic changes to a property. Her goal is to find distressed properties that are sitting on the Fence of Viability and bring them back to a desirable state (i.e., one in which others would actually desire to own them). Time and "holding costs" are less of a concern than the quality of the outcome. Certainly she does not choose projects that will lose her/us money, but her selection criteria reflect a certain amount of altruism mixed with capitalism — she wants properties which deserve in some manner to be preserved and enjoyed by successive generations. She's sort of a free-market landmark preservationist, if you will.

Anyway, we bought this house in, truth be told, what used to be considered by the residents (and is still considered by outsiders) to be a Bad Neighborhood. We both knew it was going to be a longer-term project so, to negate the power that Holding Costs usually exert over rehab projects, we moved in. Let me tell you, there is no experience like the reality check you get from moving somewhere that none of your friends or family will visit. We very, very quickly realized this was going to be a project like no other. Neither our northside Chicago property nor our non-Chicago properties prepared us for this.

Now, because of what I do for a living, I have at least a passing acquaintance with a diversity of real estate topics in addition to involvement with my wife's projects. Many (all too many) years ago I spent some time as a lowly temporary employee at the National Association of Realtors, and I look back on that now with a certain amount of wonder at how inauspicious my introduction was to the business of real estate. And, in fact, I have seen a huge amount of both good and bad since then with regard to that business. Property purchases, for most people, are some of the most momentous (though usually infrequent) transactions in which they will engage during their life, and it absolutely stuns me how relatively difficult it is for many people to get good, solid, DISINTERESTED reference material to peruse when it comes to the subject.

That may seem an absurd claim but, in case you hadn't noticed, "disinterested" is the operative word in that sentence. Try going online and doing a search for "real estate" and look at the domain names of the sites that come up. How many of them are real estate agencies, agents, brokerages, or industry-driven sites (e.g., Versus, say, news articles, government guides, or websites with how-to content relating to property purchases and other matters?

So, I'm starting this diary, blog, or whatever you want to call it, both for my own self-serving purposes as well as for the edification of anyone who might one day happen to stumble across this and find some bit of informative content they might not be able to find elsewhere.