Re: How Can I Defer Payments ?[very long] - Posted by Ronald * Starr (in No CA)
Posted by Ronald * Starr (in No CA) on November 30, 2001 at 22:16:58:
As others have commented, and I agree, this is a risky venture.
This sounds like an ideal situation for a lease option, so I think your move in that direction makes a lot of sense. I wonder if you could structure the deal as a lease option and still get the owner to agree to it? I am thinking of what is probably a “sales” job on the seller. Talking about the negative aspects of property ownership that are motivating the owner and trying to handle those, even though she is still a property owner. You will take over all maintenance of the property – or all but heating/AC and roof, to limit your liability some. You will pay regularly and have a big penalty for not paying as agreed. This sort of thing. Now, it is possible that the seller has seen this big price decline and thus fears still more to come. If this is so, it may not be possible to reassure her. And she may be reluctant to mention this notion for fear of scaring you off. She might open up about this if you ask her directly and assure her that her view will not deter you.
That sounds like a very sharp decline in the value of homes. Do you have substantiation of this? Typically, I might expect 10 or 15% decline in a year, but you are talking about a 40% decline. How long is this?
Wait a minute! I just did some analysis of sales of homes in Carmel. I compared the sales prices of homes that sold in both 1997 and 1999, the last year for which I have available data. I found 42 such sales. The price range for the sales in 1997 was $275K to $1.995Mill, for 1999, this range was $390K to $2.275Mill. Every single one of these houses sold for more in 1999 than in 1997. The average increase was right at 50%. From this, I know that 1999 was an up-year.
Oh-oh. I don’t really know that do I? I only know that in a two year period prices increased an average of 50%. They might all have doubled between 1987 and 1998 and then dropped down to 50% gain over 1997 in the period 1998 to 1999. Sorry for the error. I could have just left out that section and made people think I don’t make mistakes. But I left it in because I remember somebody once advicing beginners to notice how “gurus” think. Well, then here is how I think. Check to be sure that you know what you think you know.
Alright, I ran the analyses again with properties which sold in both 1998 and 1999. I found a total of 31 of these sales. Sales prices in 1998: $44K to $1.85Mill. The 1999 sales prices ranged from $200K to 1.850Mill. This time, we see 28 of 31 selling for more in 1999 than 1998. The average increase in selling price is about 72%
Boy that looks strange, a greater increase in price from 1998 to 1999 than from 1997 to 1999? We must have a lot of rehabber projects coming in here. With properties selling for more not because of natural appreciation, but from forced appreciation. This is probably so. I see one property selling for more than 4 times as much the second time, two selling for over three times the earlier sales prices, and three selling for over double their prior price. Those are not appreciation numbers.
Well, ok, so we can’t really judge how much appreciation there was was naturally between 1998 and 1999. But, the point is clear, there is appreciation. Thus, we can now say that 1999 was a year of high prices, higher than prior years.
So, now to the point. How could property values drop 40% since 1999 to now? I doubt seriously that they have.
So, my point is that I wonder about the source of that $1.25Mill valuation in the past for this property. I also, therefore, worrry about the prospect of it ever getting up to that value in the future. If it has never been there in the past – which we don’t know for sure, but certainly looks reasonable from the above analysis–there is more doubt that it will ever get there in the future.
Well, we saw high appreciation rates in the late 1990s, so I guess it is possible that there might be fast depreciation rates in the 2000s. But my observation over many years is that the appreication tends to go up fast and depreciation down slowly, as sellers tend to welcome appreciation and resist depreciation.
So. I think you better have very good reason to think that the appreciation will be there in the future, since you are betting your wealth on it.
Do you want to submit your analysis that leads you to expect high appreciation soon? Maybe others here could comment on that number-crunching or number-hunching, as the case may be, and give you some feedback. I think people here are worried that you may take a financial bath and might well want to help you keep from doing so. Certainly, that is how I feel.
Good InvestingRon Starr**********