The Reality of My Estate

The Brain Dump of a Chicago Real Estate Consumer

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...


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