REI during a recession? - Posted by Claire Murray

Posted by Judd on September 13, 2001 at 20:27:37:

After reading my previous message,I did not mean to be so harsh in my tone. I know from personnal experience. In the Ft Hood, Tx area, I own a home which has been rented out since 89. during DS/DS in 90/91, it went from a value of over 60K to around 40K. Others were much worse. I was fortunate in that my tenants did stay, and the value did come back. I can verify the drop in my property, in that my tenants tried to buy my house during my deployment. It was going to cost me money to sell it. I declined. Several months previous, I had over 20K in equity. Also I would note that I do the best I can (being a long distant owner) to keep my rental property in top condition. In return I do get the top rent for my property’s size/category (SFH).
I realize that different areas have different reactions.
However, after Desert Storm, the US Government instituted a buy back program for veterans which were hurt by the extreme devaluation of their properties. Also after DS/DS, one division (2nd Armor Division) was stood down (part of the drawdown) at Ft Hood (count 25-30,000 soldiers plus family members).
One factor which helped the Ft Hood TX area recover was the relocation (about a year later) of an entire division (4th Infantry Division) from Ft Polk, LA to Ft Hood.
Again, your area may be different, but most areas during the actual deployment or conflict suffer. Most of the contractors which make the higher salaries, do so because they deploy with the troops.
In Killeen TX, the only businesses which did not suffer severe depression were the hallmark shops and ribbon stores(they sold miles of yellow ribbon).
Best to all in your future investing.

REI during a recession? - Posted by Claire Murray

Posted by Claire Murray on September 13, 2001 at 12:30:14:


This question goes out to the experienced
RE Investors in this group…are “no money
down” and other creative financing techniques
feasible during a recessionary economy?
It seems almost certain that our economy is
about to go into recession; so is this a good time
or not to expand from my one rental property to
multiple properties?

The worst recession that I recall was… - Posted by David Krulac

Posted by David Krulac on September 15, 2001 at 20:23:14:

in 1980-1981. The interest rates for mortgages was 17-19% fixed for 30 years. 30 year T-bills were paying 15%. 50% of the real estate agents quit the business because of the lack of sales. And market time for SFH was typically greater than 1 year. It was not the best of times.

However I was still buying houses and so were others.
The rental market was good as many people weren’t buying. Sellers had to be flexible in terms price or both if they really wanted to sell. A real estate broker approached me about a rental property that he owned, that he wanted to sell. He asked for a 12% first mortgage seller financed with a 3 year balloon, we settled on 9% fixed for 15 years NO balloon. the rental market was good, the selling market was poor, but the buying market was exciting and there was not much competition.

Just a thought - Posted by CurtNY

Posted by CurtNY on September 14, 2001 at 13:37:56:

Nothing boosts an economy like a war.

Re: REI during a recession? - Posted by Ben (IN)

Posted by Ben (IN) on September 14, 2001 at 08:09:40:


Whether it’s a recession or not, people are still buying houses. Back in the early '90s when the economy tanked virtually nationwide and the banks were swollen with repos, people were still buying houses. Home sales were still taking place.

During a recession people are more strapped financially, and in general there is less disposable income in the general population, so the people who do buy are looking for the best deal possible for the buying dollar. And the people that might buy if the economy were better are just staying put for now.

What that means for you is no more borderline deals. You can’t be a dumbo when buying. Make sure you are buying quality properties, or something that you will turn into a quality property, in great areas. If you are doing that, you will be putting yourself in the path of what people want, and their buying dollars. If you are not doing that, you’ll simply be ignored by homebuyers.

That means you’ve got to be very targeted with your marketing. No more just putting an ad in the paper and hoping someone calls with a deal. Research the areas in your city where the greatest number of home sales are happening and concentrate your efforts there. Decide on the profile of the deal you are going after, and the level of motivation of the seller you are going after, and have the discipline to pass on anything but just those deals. If your marketing is targeted enough those are the only people who will be calling anyway.

A recession doesn’t mean you do any less business. (In fact, recessions are typically when the greatest fortunes are made.) It just means you have to begin being smarter and more deliberate about you approach.

Start doing your homework, stake out a territory, and go to work.

Ben (IN)

Re: REI during a recession? - Posted by Ron

Posted by Ron on September 13, 2001 at 22:16:28:

To directly answer your question - the techniques are most feasible in a recessionary environment - even the banks are willing to do deals - foreclosures abound and hence the REO’s increase - pre foreclosures are also to be found in abundance - the property values may go down but you can buy at discount and when the economy gets rosy again you are sitting on “bonus equity” - also the people who are forced to give up their homes will need a place to live too - in a recession the renter market will increase as a rule. The bottom of the market is the ideal place to buy from an equity gaining perspective but there is no way to know when that will come to pass. Good luck.

Buy near military installations - Posted by nona

Posted by nona on September 13, 2001 at 16:14:20:

If there is a military action (e.g. war), then the areas surrounding the more active military installations will see an influx of people to help with war effort, whether short-term or extended. Even though Desert Storm only lasted a few days, the effects were long lasting in the areas surrounding military installations.

Re: REI during a recession? - Posted by Sean

Posted by Sean on September 13, 2001 at 16:02:55:

Since much of creative real estate involves finding motivated sellers and dealing with them, anything that increases the number of motivated sellers can make it much easier to deal in creative financing.

However the tactics you employ in a rapidly appreciating market will not necessarily work in one that isn’t. In a rapidly appreciating market it is enough to simply purchase a house no money down and put a renter in it. You know that appreciation will get you a nice profit.

In a depreciating market you need to push the Seller much harder to give you a discount in PRICE. Cash is very nice to have in a down market because people will readily discount for cash if they’re in trouble. While it is relatively easy to get good terms or a good price getting BOTH is a hard sell.

If you are interested to know if prices are on their way up or down you could always check out the fine work that Mr. Campbell has been doing in San Diego. One of his articles ( discusses his “Vital Signs Indicator” that looks at interest rates, loan default rates, foreclosures, new home permits and home sales to forecast when the market will be going up or going down.

Last I checked he didn’t have his full system out yet, but you can bet it’s at the top of my buying list considering how close I live to San Diego County. Your mileage may vary.

Re: recession REI? options [long response] - Posted by Ronald * Starr

Posted by Ronald * Starr on September 13, 2001 at 15:05:50:

Claire Murray--------------------

When an investor expects a commodity price to decline in the future, the way to invest is to sell an option to somebody who does not think there will be a decline. This is a gamble. The idea is that the money from the option is extra income. If the optionee does not excercise the option because values have dropped, the optionor (owner of the commodity) gets to keep the option consideration and still has the commodity.

So you could sell an option on your one rental property to somebody who would like to get that price sometime in the future. You might set a option exercise period when you expect the price to be lower than the price in the option – say 2 years from now. If the property is worth more than the option price, there is a likelihood that the optionee will go through with the purchase.

Another way to play this game, with less risk, is to option to people the chance to buy a property which you do not own. Not too interested in doing jail time for selling somebody else’s property? Not to worry, you do not need to own the property to sell an option on it. You need only have to have an option to purchase the property from the owner.

The idea would be to pay less for your purchase option than the amount that you charge somebody else for the sales option. You could then sell your option to your purchaser – optionee, actually. Then that person could purchase if things look good. Or, you could hold your purchase option and sell your sales option to the property, hoping to cash in on the option if it is excercised later. This could be true if you have agree to pay a lesser price than the person to whom you have optioned the property.

If you have acquired control of the property with a lease/option to purchase, you could rent out the property to a renter and sell an option to an investor. The idea is that your rental amount should be more than the rental expense to you. Plus you get the option consideration.

Or your could do a sandwich lease/option, where you have a renter/optionee who rents from you and has the right to purchase the property later. Again, you should be able to get some option consideration up front, hope to get rental income, and then, sell the property for more than the price you have agreed to pay for the property.

If prices drop and your optionee does not excercise you sales option, you could decide whether to excerise your purchase option, try to find a buyer for the property, or let your option expire. The worst that happens is that you have no added profit beyond the option consideration and possible rental cashflow.

If you have just an option, without a lease, you will not have rental income. But you also have less risk. When you are the leasee as well as the optionee, you take on responsibility for the property. So if your renter or renter/optionee does damage to the property, you are on the hook for that. If you are strictly an optionee, without a lease, you do not have responsibility for the property. You may also, of course, not have much say what happens with the property, so the owner or the owner’s renter may do damage to the property, making it less attractive to you and to your optionee. I suppose you might have some obligation to your optionee to monitor the property and to prevent the owner or owner’s renter from continuing to damage the property should you see it happening.

Anyway, options are a way to play the market when you expect a declining price of a commodity.

Good Investing********Ron Starr****************

Real Estate Bubble - Posted by Doug W

Posted by Doug W on September 13, 2001 at 14:37:45:

I was just about to post a similar question, so I thought I would echo your concerns. I opened my mail today and received an investment letter from a well known and competent investment advisor. His comments were simple: " Get out of Real estate!", he went on to say that we are about to experience one of the biggest crashes in real estate values in the history of mankind.

This comes at a time that I am gearing up a marketing campaign for lease options. I am obviously concerned and don’t want to get stuck in a downmarket. It’s easy to say wait and buy at the bottom but some of us need the additional income REI may provide and/or won’t necessarily have the bucks to buy at the bottom of the market.

Any thoughts on wise investment moves if indeed the Real Estate market is headed for a fall?


Re: REI during a recession? - Posted by Robert M. Campbell

Posted by Robert M. Campbell on September 13, 2001 at 13:09:00:

If your local real estate market goes into a downturn, the safest way to invest is to be patient and wait for the market to hit bottom before you buy. Then use creative financing techniques to take advantage of the “fire-sales” that will available in abundence.

Naturally, the best time for most people (not everyone, mind you) to invest capital in the the market is when risk is low and the opportunity to sell at a higher price is great. Seldom is this the case at the BEGINNING of real estate decline.

Down markets are dangerous. For most people, trying to make money in a down market is like trying to pick up dollars in front of a bulldozer. It may look easy but one slip and you’ve got a big problem.

Robert M. Campbell

Wrong, Opposite Effect - Posted by Judd

Posted by Judd on September 13, 2001 at 16:48:34:

Actually, during Desert Storm, real estate values near major bases plummeted (up to 50%). When the soldiers deploy for unknown periods, often times the spouse and family move back home to stay with their parents. Rental contracts are broken and judgements in favor of landlords are seldom if ever won.
This could, however create a buyer’s opportunity if you are just starting. Within a short time after the soldiers come home, prices almost rise to normal. This will depend on how many more troop cuts we keep having.
Just food for thought.

Great ideas! You’ve got me thinking (nt) - Posted by Scot - SoCal

Posted by Scot - SoCal on September 13, 2001 at 15:53:08:

Re: Real Estate Bubble - Posted by Sean

Posted by Sean on September 13, 2001 at 16:15:28:

For certain we have experienced a large ‘bubble’ due to the Federal Reserve increasing the amount of money in circulation. An excellent article on the matter is available here (404-page | Quicken) as it relates to the Stock Market.

The Federal Reserve sometimes expands the money supply by purchasing US Treasuries on the open market. This acts to push the interest rate down (their main goal) while having the additional, unintended effect of increasing the money supply. This excess money is dumped into the hands of people who normally invest in US Treasuries and eventually finds its way from there into other investments such as corporate bonds, junk bonds, stocks and real estate.

The best current measure of money that we have is called “MZM” or money of zero maturity. MZM growth went lower and actually became negative slightly before the stock market began its long, painful descent. Now the Federal Reserve is trying to pump more money into the system to reverse its course.

Is the decline reversible? Some people insist yes – that whenever MZM growth goes above 4 percent that stocks head upwards. Others point to Japan where interest rates have fallen to 0 percent without making the stock market rise.

The crash cannot be averted indefinitely. That does not mean, however, that the Fed couldn’t manage to give us more time of illusory prosperity. I sure wish I knew the future.

Re: competent investment advisor? - Posted by JD

Posted by JD on September 13, 2001 at 15:42:24:

while there are many, including myself, that think the RE market has crested, I know of no credible investor that thinks the RE market is going to crash (unless possibly you live in Silicon Valley or some other odd bubble area that has seen outrageous price inflation over the past three years). Who is it that is making such a recommendation? On what basis? Is it a regional recommendation?

Who is wrong? - Posted by nona

Posted by nona on September 13, 2001 at 17:08:53:

I don’t know where you got your information from and I suggest you post your source, but in my state and the surrounding states we had a large increase in the number of people coming in. I just went to a board of realtors web site for my state to see what the appreciation was in 1990-1991 (we are near a large military (army-air force) complex. The appreciation was over 20% during this time period.

Re: competent investment advisor? - Posted by Doug W

Posted by Doug W on September 13, 2001 at 17:11:12:

Writer by the name of Nick Guarino. Is he credible…I don’t know for sure. However, he did call the tech and dot com bubble very accurately. Of course, I don’t believe everything written but I am concerned.

Since I’m just starting out I guess I’m a little skittish.