Value Cushion from the Next Wall Street Sucker Punch

by | May 15, 2013 | Archives

May I predict the next Wall Street sucker punch headed our way?

We have been seeing a glimpse of the next big stock market ripoff that is being built.

Merri and I have been recommending, and searching ourselves, for rental real estate houses to invest in since early 2009.

mt dora house

Most recent rental house we purchased.  We have been buying houses like this for far less than their replacement costs.

My first recommendation to do this was in February 2009 Andean Shamans and Truth

You may want to read the message in 2009 because it shows how integrating logic and intuition can lead you to steady wealth… again and again and again.

Our timing could not have been better and by January of this year we posted an article “Power of Positive” which said:

#1  Problem:  Real Estate Collapse and hard to get mortgages. Winning Idea: Invest in real estate for rentals

A January 22, 2013 article in USA Today entitled “Rental Investors pant for next hot home market”  tells how home shoppers are now seeing multiple offers, bidding wars and shrinking supplies of homes for sale as investors swoop in.

Major institutional investors are amassing a $10 billion war chest to pursue the single-family rental market, JPMorgan Chase estimated in a recent research report.

This $10 billion dollar war chest may be the beginning of the end of our buying rental real estate for now.

I believe we have gained good value in the houses we have purchased.  This has not come without effort.  We have scoured probably hundreds of properties on the internet, looked at a ton of these, offered on a dozen and have invested in six places for this effort.  We mainly buy fixer – uppers like this one.

rental-house

Mount Dora house we tried to buy.

This house had all the qualities we looked for.  The house looked terrible.  This is good that it seemed liked a wreck.   Careful inspection showed that the main problem was mainly dirt, a little flooring, a few rotted easily replaced pieces of siding and really poor landscaping.  The asking price ($84,000 – about $50 a square foot) was a good value.

Prices of houses in Central Florida have risen dramatically.  Properties in the range we seek do not stay on the market for long. We act quickly.  We know what we want, how to find them  and in this case we  offered full price.   The deal was delayed and delayed.  Finally the house was pulled off the market and foreclosed.

I still liked the deal so we checked out the title and found that this house was going to be sold on the courthouse steps.

Enters Herb
We sent an agent to the auction where this property was sold (for $81,000) along with 20 other houses in 20 minutes.

All of then were purchased by one man… Herb.  I have changed his name to protect the guilty in this case.

Our broker approached Herb and offered him a quick profit.  “Nope, we are fixing them all up and renting them”, he said.

We checked.  Herb works for a hedge fund.

Here is the triple ripoff I believe we will see.   The banks that are buying these rental houses will bundle them just as they bunched mortgages. They will sell the bundles on the stock market.

I believe from the way he was buying that he was not getting good value on many of the properties he purchased.   Even the place he bought for less than we offered will not be a very good value for an institution.   We have a low cost method for fixing such places.  Institutions will spend too much making that house ready to rent.  Plus some of the stuff that he purchased appeared in my opinion to be really bad value.   It appeared that his goal was to buy everything below $150,000 regardless of value.

If I am correct. three events will take place.

First, investors like myself who can take distressed properties and fix them in a value oriented way, can be priced out of the market.

Second, housing prices will become less affordable again and many Americans will not be able to afford to buy or even rent a home.

Third, (the worst of all) these syndicated rental properties will be offered on the stock market (if they are not already there) and they will have similar disaster risks as the syndicated bundled mortgage shares.

This is an early warning.

Gary

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