If you spend any time listening to the various news outlets, it is very easy to become less than positive about Michigan; the slowing economy, declining home values, rising unemployment, etc. I want to share with you in Paul Harvey’s famous words, “the rest of the story.”
One of the keys to having perspective today is by looking back in history. Probably the closest similarity to what we are going through is the Houston, Texas market in the mid to late 1980’s, click here to read more. The similarities between Texas & Michigan are strikingly familiar.
1. Texas’ primary industry then was its Oil production, here in Michigan it’s Auto manufacturing.
2. The Savings & Loan crisis of the 80’s is similar to what is happening in the Sub-prime mortgage market although not quite to the same dollar volume, at least not yet.
3. Texas was in a recession then, and Michigan is currently the only state with a negative GDP.
What made the Texas time period worse than Michigan now was the passing of a few tax laws making tax credits available to investors which prompted huge over building and over supply of residential and commercial construction. We have not seen the same over building, especially in Lansing. For Texas, this led to a longer recovery time for housing values and inventories than we will need to prepare for.
Now for the rest of the story– Michigan for many reasons will remain in the top 10 for foreclosed single family homes in the next 12 to 18 months – maybe a little bit longer than that. This fact will produce two main realities for us.
1. We will have many opportunities to buy homes from banks at very low prices.
2. There will be an increasing number of families and individuals in our market that need a place to live and cannot get an affordable mortgage due to lower credit scores and tightening lending standards.
Add these two things together and you are at the cross roads of opportunity – if you’re prepared. It’s been said that Luck is where opportunity and preparedness meet. This is a great time to add real estate to your portfolio, whether you buy and hold the property for 2 to 5 years or flip it, now is the perfect time to buy – prices are low.
We are helping clients evaluate whether this strategy makes sense – it’s not for everyone. By doing a cashflow analysis, we can help quantify the numbers in your scenario to determine what the best and worst case outcomes could be. Here is just one case study, but we are working with more and more clients to achieve similar results.
This couple purchased land and built a home just outside of town 3 years ago. When they completed their home, they had it appraised for $50,000 more than they paid to build it. Today it appraises for about $5,000 less than they paid to build it. This was not very exciting news.
Then, this summer, a home in their neighborhood came on the market and they soon found out that the home was listed well under what it had sold for a few years before. It had sold then for $100,000, and the bank was asking for $65,000. They offered $60,000 and their offer was accepted. They plan to put $10,000 into it as improvements – in this case, a roof and carpet and a few other minor repairs. They will likely not do any of the work themselves as they are very busy with life right now.
We will do a loan for $70,000 and the value of the home on an appraisal is around $90,000. To make a long story short, in 5 years, the value will likely be around $130,000 while the mortgage balance will be around $65,000. They plan on renting the home for the same amount as their monthly payment.
The will end up with nearly $60,000 in equity in the home – WITH NO INVESTMENT OF THEIR OWN MONEY. They could sell it in five years, or they could hold it for 15 years and then sell it. In 5 years, they will likely turn a $60,000 profit without a dollar of their own money (remember their loan paid them back their initial investment.) Do you know what kind of return that is? It’s an infinite rate of return – how does that sound? In 15 years, the home will likely be worth over $150,000 and be close to being paid off. Lemonade from Lemons.
I will be sharing some of these strategies and case studies at our next Wealth Workshop. Recent attendees give their comments below. Don’t miss this opportunity to evaluate a strategy that can boost your financial net worth. If you are a builder, come learn how a “Trade” can help you retain the value of your neighborhood and provide a win – win to everyone involved.
I am committed to you, my client. In a market like this, it is less likely that you will make a mistake and lose money. It certainly isn’t guaranteed, nothing valuable is, but with the right professionals involved, you have a great chance of doing well. I look forward to seeing you at the Kellogg Center on the 27th!
Anyone CAN do something positive in THIS market – will YOU?